Hedge funds Millennium and Schonfeld in advanced partnership talks

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Millennium Management is in advanced talks to put billions of dollars to work with smaller rival Schonfeld Strategic Advisors, according to people familiar with the situation, in a partnership deal that would mark the largest of its kind in the $4tn global hedge fund industry.

Under the plans for the agreement, computer-driven manager Schonfeld, which manages $13bn, would handle money for Izzy Englander’s firm, which has almost $60bn in assets, the people said. Schonfeld would continue to manage money for other investors, they added. The plans have not yet been finalised.

Millennium, which employs more than 5,300 people, would get access to Schonfeld’s more than 100 investment teams, as it seeks an edge in a sector-wide war for talent. Schonfeld would remain independent and use Millennium’s long-term capital to fuel the growth of its business. 

Millennium and Schonfeld declined to comment.

After Ken Griffin’s Citadel, Millennium and Schonfeld have been the two best-performing names in the multi-manager universe, the fastest-growing and most profitable part of the hedge fund industry. Both firms were founded in New York more than three decades ago.

The multi-manager groups typically employ between tens and hundreds of autonomous and highly specialist risk-takers in teams or so-called pods, which trade a range of different strategies and operate within strict risk limits. While the pods focus on investing, the parent platforms take care of everything else from operations to marketing.

Millennium allocates capital across more than 300 investment teams. As its assets have swelled, through strong performance and client inflows, the firm has faced the challenge of putting cash to work. It has returned billions of dollars to investors over the years and no longer takes in new money.

The Schonfeld deal presents an opportunity for Millennium to diversify its business, with a meaningful amount of capital that could boost returns.

Millennium’s investment approach focuses on four areas: relative value fundamental equity, equity arbitrage, fixed income and quantitative strategies. A tie-up with Schonfeld, which concentrates on fully automated trading strategies, would boost its firepower in quantitative investing.

Instead of an annual management fee, the multi-managers employ a “pass-through” expenses model, where the manager passes on all costs — including office rents, technology and data, salaries, bonuses and even client entertainment — to their end investors. Costs in the pass-through model typically work out at between 3 per cent and 10 per cent of assets each year, and a performance fee of 20-30 per cent of profits is typically charged on top. 

The planned tie-up between Millennium and Schonfeld comes as a voracious and increasingly expensive competition for talent is putting pressure on the platforms’ business model, and returns for many multi-managers have tailed off this year.

In the year to the end of August, Millennium gained 5.5 per cent, Schonfeld was roughly flat, and Citadel was up 10.8 per cent, according to investors.

Millennium has a similar partnership agreement with WorldQuant, the quantitative investment shop run by Igor Tulchinsky, who joined Englander’s firm in 1995. WorldQuant spun out of Millennium in 2007 and manages about $10bn, split between the $7bn or so it trades on Millennium’s behalf and a roughly $3bn fund open to other investors. 

WorldQuant has been a crucial contributor to Millennium’s record and Tulchinsky is one of its best-paid investors.

Schonfeld began life as a family office in 1988 with $400,000 that its eponymous founder Steven Schonfeld earned working as a stockbroker. The hedge fund’s current iteration dates back to 2015 when it opened up to external investors. In addition to quantitative trading, it also runs discretionary macro, fundamental equity and fixed income strategies.