BNY Mellon pitches to take on multi-manager hedge funds

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A $111bn investment boutique owned by BNY Mellon is seeking seed capital from investors to enter the multi-manager hedge fund business dominated by the likes of US giants Citadel and Millennium.

Mainstream asset manager Newton Investment Management is pitching investors a multi-manager hedge fund with teams trading equities, currencies, commodities, bonds and quant strategies. The talks are still in their early stages and being led by newly appointed deputy chief investment officer for multi-asset, Paul Brain.

Multi-manager funds are the fastest-growing part of the $4tn global hedge fund industry as investors seek consistent returns that are less correlated with equity markets. In the past five years, multi-manager assets increased by 150 per cent while the rest of the industry grew by just 13 per cent, according to Goldman Sachs estimates. 

Newton’s planned hedge fund would seek to replicate the success of prominent multi-managers, but at a lower cost than some of the high-profile players in the industry.

“We believe the cost of offering this [type of fund] should be lower,” said Euan Munro, CEO of Newton Investment Management.

Newton’s attempt to enter the multi-manager hedge fund space is unusual given most large hedge funds are not affiliated to banks. Most banks offer an investing platform for institutional clients but not a large-scale hedge fund.

Mellon acquired three-quarters of the London-based boutique asset manager in 1996 before purchasing the remaining chunk of the business in 2002.

Multi-manager funds tend to employ between tens and hundreds of autonomous and highly specialist risk-takers in teams or pods, overseen by a centralised risk management team. Instead of an annual management fee, the manager passes on all costs — including office rents, technology and data, salaries, bonuses and even client entertainment — to their end investors.

In practice this can amount to between 3 and 10 per cent of assets, while performance fees can be as high as 30 per cent. The average hedge fund fee in 2022 was a 1.39 per cent management fee and a 17.3 per cent performance fee, according to analysis from trade body AIMA.

Munro said Newton’s fee would be lower than the giants that dominate the industry, but declined to specify details.

Multi-managers’ pass-through fee model has enabled them to invest heavily in areas such as portfolio managers and technology in pursuit of an investment edge. The cost has been more than offset by performance.

Years of investment by in their businesses by the likes of Citadel and Millennium also give them huge scale and incumbency advantages.

One allocator of investments to hedge funds questioned if Newton would be able to attract top talent without charging the high fees of the large multi-managers that dominate the industry. “We are seeing more and more funds switching to the pass through model or increasing performance fees to remain competitive in the compensation game,” he said.

Newton said that it would still be able to compete for talent with existing multi-managers despite offering lower fees, however.

“My experience is that it’s wrong to assume that all talented [portfolio managers] want to work in a ruthless environment focused on personal performance,” Munro said. “In my experience no two talented [portfolio managers] are the same.”