The Ledger
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Multi-strategy platforms will continue consolidating market share and trading talent
“But if you look at it over five, 10, 15, twenty-year periods, I think the secular trend is going to be sustained. So if you look at the market share in terms of investor dollars, or the market share even more so in terms of the alpha pie in the markets, or the…”
Starting an independent hedge fund makes no sense 99% of the time
“It's a way to attract people who are very entrepreneurial and who are real business builders, whereas 20 years ago they probably would have just started their own fund, but now the industry has evolved to where there's so many impediments to doing that and so …”
Small independent hedge funds suffer from severe adverse selection in hiring
“They have negative hiring and retention selection because they can't compensate their teams as well. They have negative technology and data selection because you can't invest as much in that. And just the time suck of managing all that versus trading and inves…”
Long-bias funds pose far greater dollar risk than market-neutral multi-strat platforms
“I think for some reason it gets singled out to this space, but much larger risk in dollars is the more long bias strategies that are common across other areas. So if you look at last year and you think about the meltdown in growth investing and whether that wa…”
BAM delivered 20 positive years out of 21 with zero correlation
“We've had, knock on wood, 20 out of 21 positive years, and very consistent volatility, and drawdown management, and Zero correlation over that time.”
Overcrowded trading strategies rapidly shift talent from overbid to unbid
“If you have a strategy that's done well, and everybody's making money in that strategy, the talent in that strategy tends to get bid up. Then more people build teams in that area, more people overpay for the cost of building those teams, more capital gets depl…”
Series D companies fundamentally resemble multi-billion-dollar publicly traded stocks
“So if you're looking at a private company, that's a growth company raising a series D round. Is that dissimilar from a publicly traded company with a couple billion dollar market cap that your public PMs are investing in? Most of the time, it's not that differ…”
Managing large capital requires developing longer-term fundamental views on companies
“I thought we wanted to manage more capital and hold positions longer. The only way you can do those things is you have to have a view on companies longer term.”
Scaling multi-strategy verticals requires partnering with business builders, not just capital
“So it's much more than just hiring people and giving them capital, although that's obviously a significant and important part of it, but a lot of it is you're really trying to partner with business builders in these different areas that bring a lot of that Tho…”
BAM avoids long-term CTA strategies due to unappealing Sharpe ratios
“Or some things have sharp ratios that we're not excited about. So traditional long-term CTA type trading, we're not really that excited about.”
Balyasny says five- and ten-year trading business plans are completely unhelpful
“I think five- and ten-year plans, I think markets change too much, and it's not usually that helpful, but I think one, two, three years is pretty helpful, and then you're obviously iterating those every year.”
Specialist PMs get hurt by cross-market spillovers, not sector surprises
“In order to be a really effective specialist PM, they typically don't get hurt when there's something in their area of specialty that they're surprised by. Like, they're usually all over that. But they usually get hurt when there's something that's rolling thr…”
Talent mapping is efficient in equity long/short but inefficient in quants
“It's relatively efficient. I think it depends on the transparency of the strategy. So equity long short, I would say is pretty efficient. There's a lot of teams. They all go to the same conferences. A lot of them know each other. People move around. Analysts m…”
Running a standalone long/short equity sector fund is extremely difficult
“I think in longshirt equity, it's very hard to run a standalone sector fund. I mean, it's hard to run any sort of fund. You have all the challenges from running an equity fund, but then on top of that, you have all the challenges from running a specialist equi…”
Multi-strat funds survived Schonfeld's early days while single-manager funds failed
“If you look today and see how many of those funds are still around, very, very few of the single manager funds are still around. But the multi-strats we invested in at the time, most of them are around.”
Senior PMs distinguish themselves by predicting multiple changes, not just earnings
“A big difference between a more junior analyst and a more senior analyst and then a PM It's really an understanding the drivers, the story, the sentiment, which will lead to the multiple change. The frequent complaint you get from analysts when they're going t…”
Promoted analysts usually know stock picking but lack portfolio construction skills
“So typically they'll know stock picking, but they won't know portfolio construction. They might've not had a lot of experience to trading. They probably wouldn't have managed a lot of people before.”
BAM increased its allocation to macro strategies from 15% to 25%
“So we might take macro, for example, from 15% to 25% if we feel like the macro opportunity set just got a lot better, which we did the last couple of years.”
Relative value strategies require preserving capital ammunition during drawdown periods
“And so those are more on a mean reversion basis, where those guys will pick up their hands and go, this is the time we need to step up. And the trick is you want to hopefully have navigated the drawdown period well enough to where you have the ammunition to st…”
Directional macro and growth equities justify momentum-based capital allocation scaling
“Other strategies that are, I would say, a little bit more momentumy, like the growthy sectors in equity investing, or directional macro trading, those tend to be a little bit more momentumy, where a good environment feeds a good environment for periods of time…”
The best trading environments happen when generalist capital inflows are high
“In general, the best environment is when there's a lot of generalist participation in a strategy, and there's a lot of money coming into a strategy. Because then your specialist participants, whether they're trading bonds, currencies, commodities, equities, li…”
Specialist-only trading environments create low risk tolerance and cascading drawdowns
“Another side, the worst environment is when there is no generalist capital, and money's flowing out of the strategy, and the specialists in the strategy are all underwater. And so in that environment, you're trading against other specialists, and nobody has mu…”
BAM adjusts sub-strategy risk up or down 50% based on market regime
“Your risk in a particular sub-strategy could be up or down 50% very easily if you're in a good period versus poor period.”
Team building is the biggest gating factor for scaling portfolio managers
“The biggest gating factor to someone's success growing from a first-time PM to an experienced PM or a small PM to a large PM is their ability to build a team, to manage a team.”
Young hedge fund analysts take a couple of years to become additive
“So we see a lot of times you'll have a younger PM. And by definition, they'll then wind up almost always hiring really young analysts, and the expectation is this person's going to come in and help me make a lot of money. It's just not realistic. At the stage …”
Firms hiring portfolio managers in three days fire just as fast
“You want to be aggressive and move quickly, but if you're going to take three days to hire somebody, they'll probably take three days to fire somebody.”
Short-duration capital cripples quantitative hedge fund recruiting due to non-competes
“If you hire a quant PM today, a lot of them have two year sit outs, and then they take another year to build. So they have to believe that they're joining a place that's going to have plenty of capital and resources for them to deploy three years from now. So …”
Cross-strategy infrastructure will increasingly differentiate hedge fund returns
“More and more, I think that's going to be a differentiator in return because the commoditized stuff that's fairly easy to do, by definition, more and more people are going to do that.”
Painful-to-build trading businesses create lasting competitive moats around hedge funds
“So we kind of like those areas where you can export some of your capabilities, but that are difficult and painful to build because it keeps competition up. It might take you a number of years, but if you can do it, you got to moat around the business.”
Public hedge fund managers cannot effectively execute private investments directly
“But there's also a lot of particulars in the private space, so you have to build that capability separately. You can't just have public guys do it. You can leverage off of their skills and team with them, but it's different because first of all, you have to ha…”
Analysis paralysis destroys opportunities; investors must get involved to truly learn
“You could do analysis forever, and if by the time it becomes obvious, usually the opportunity is gone, and so a lot of times you're not really going to learn everything until you're involved. You just got to figure out how to get involved in a risk responsible…”
Thomas H. Lee's advice to asset managers: 'do it big'
“This business is a pain in the ass. If you're gonna do it, you might as well do it big. He's like, it's a pain either way. Cause you're always dealing with lots of different constituencies and lots of different people plus the markets. So if you're going to bo…”
Novice traders should master a narrow risk box before expanding scope
“You just create, like, a very well-defined small box to start, where you just have, like, a few elements to worry about. Only had a small number of trades, a small number of potential trading instruments, small holding periods, You kind of define the types of …”
BAM began as a prop fund with only Balyasny and Schoenfeld investing
“We became a hedge fund, but with proprietary capital where myself and Steve Schoenfeld were the only investors, and then we fully spun it out and started taking external capital and also piece by piece weaned ourselves off of the middle and back office and sta…”
BAM's fundamental equity risk dropped from 100% to roughly 50%
“So fundamental long short equity trading is still the largest strategy, but that's down from being a hundred percent of the risk in the early days. Even five years ago, it was probably 85% of the risk. Now it's about 45 to 50% of the risk.”
BAM avoided physical commodity trading initially because it takes years to build
“For example, you know, physical trading takes a long time to build out. We didn't want to start with that.”
BAM has executed several fund roll-ins with more in progress
“You have the fun roll-in piece. We've done a few of these recently. We have a couple more in process where guys have done reasonably well as an independent shop, but they haven't been able to scale the business to where they've liked”
Balyasny Asset Management is building a growth-stage venture capital vertical
“We're building a growth stage, venture capital business is another vertical.”
BAM allocates capital by multiplying volatility dollars by expected Sharpe ratio
“So we allocate capital in the form of volatility dollars, and then somebody has an expected sharp, and they multiply that sharp times the vol dollars to arrive at their expected P&L for the year.”
BAM uses multi-step drawdowns to prevent drastic portfolio cuts at once
“And so you have like a drawdown framework that's very objective and clear that everybody signs off on on day one. And that's multi-step, so you're not forced to reduce the portfolio by a large chunk at any one time.”
BAM has averaged 4% to 4.5% volatility over five years
“We've averaged about a four to four and a half percent vol as a fund for the last, I'd say probably five years.”
Balyasny says BAM's equity strategy typically averages around 4x leverage
“Equity tends to average around four.”
BAM shifted entirely to two- and three-year duration capital lockups
“Today it's all Two and three year capital up from, you know, monthly and quarterly capital five years ago.”
Multi-strategy platforms hugely outperformed single-manager hedge funds in 2022
“So last year, the Multi-strap, multi-PM space, hugely outperformed the single manager space.”
BAM is still building its quantitative trading business and infrastructure
“The quant businesses there, for example, are very developed, whereas we're in the process of building out a quant business. So they have the advantage of having that P&L stream where we don't yet, and they have the infrastructure for it where we're building.”
BAM runs IPO teach-ins for venture-backed founders preparing to go public
“So we do teach-ins between the private PMs, the public PMs, your equity capital markets desk, and a venture capital fund that'll bring a bunch of founders who are looking to go public in the next few years, and we'll do a teach-in for them.”