How to Win Against the Pods
Positioning, Crowding Unwinds, Data, Temporary vs Structural Sell-Offs, Stop Losses
Everyone talks about leaning on duration or being longer-term oriented as their advantage against the large multi-manager hedge funds (Citadel, Millennium, etc).
“They are short-term oriented. I’m not and I can take advantage of it.” How?
“Well, I can lean on duration.”
This sounds so simple and obvious, but it’s not. There are only a handful of investors or investment firms who have successfully managed to capitalize on duration against the multi-managers over any meaningful period of time.
So how do you go about positioning yourself in a world where multi-manager hedge funds (pods) have become the marginal price setter of stocks?
Understanding this is important both for any single-manager investors and for those already at a a multi-manager looking to differentiate themselves and survive over the long run.
Understanding the game pods are playing
The first and most important part is to understand the game pods are playing. Yes, there are many PMs, styles and processes at the large multi-managers, partly why the model is so powerful, so we shouldn’t overgeneralize. But we don’t care about the tail ends of the distribution. What is the common denominator in what most pod PMs do?
Where and when do they traffic? What kinds of names do they operate in? The risk model and structure of the pod system inherently create common patterns of behavior across PMs.
Are there pods that trade small or mid caps? Yes, but that is a small number of PMs who have usually earned the right to have more duration (more on this below). Overall, we care about what the average pod is doing.
Why do we care about pods so much in the first place? They have become an increasingly important marginal price setter in US and European stocks, at least in the short to medium term, driven by growing capital deployment and leverage. Goldman estimates that multi-managers hold roughly 30% of the gross market value of US equities held by the hedge fund industry, despite representing only about 9% of industry AUM, largely because of the leverage they employ. Gross leverage at multi-strats has been around 12x, up from ~8x five years ago and ~4x a decade ago.
Different types of edges vs the multi-managers
It’s not just about duration. There are many ways to differentiate yourself and define your own competitive advantage, more than we can name here.