Key facts
- Big-name hedge funds are increasingly investing in externally managed funds.
- A significant number of these external funds are run by former Citadel portfolio managers.
- At least 12 such funds have received backing from peer multistrategy firms.
- Popular investors include Millennium, Schonfeld, Verition, and Qube.
- The market-neutral investment style, common among these former Citadel managers, is currently in high demand.
The hedge fund industry is witnessing a significant trend where large, established funds are investing in external managers to find market-beating returns. A review of data indicates that a proven pool of talent for these investments consists of former portfolio managers from Citadel. At least 12 funds founded by these ex-Citadel traders have secured backing from peer multistrategy firms such as Millennium, Schonfeld, Verition, and Qube.
This outward investment strategy is driven by the ongoing competition for talent and the need to navigate fast-moving markets. The former Citadel managers often employ a market-neutral trading style, which involves hedging bets to mitigate risk. This approach is currently highly favored by allocators, with Nasdaq's eVestment reporting that over $30 billion in net new money flowed into market-neutral equity funds in the first quarter alone.
While Citadel is not unique in spawning spin-off firms, its alumni have become a preferred choice for external investors. Millennium, a prolific investor in this space, has both backed and withdrawn capital from funds managed by former Citadel PMs. For instance, Kodai Capital, founded by Neville Shah, closed after Millennium pulled its capital, and Shah subsequently joined Millennium internally. Similarly, Millennium redeemed its investment from Khalid Malik's Meridiem Capital, which is currently backed by Schonfeld.
Some funds leverage capital from large platforms like Single Manager Accounts (SMAs) to grow their asset base. FIFTHDELTA, co-founded by former Citadel PMs Niall O'Keefe and Tio Charbaghi, maintains the same terms for its SMA capital as for its traditional commingled fund investors, ensuring alignment of interests. Other funds and founders mentioned either declined to comment or did not respond to requests for information.