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The rise of multi-manager hedge funds – and the salaries their portfolio managers systematically rake in in their seemingly endless pod-hopping – has become such a mainstream topic that it has made it into the Sunday Times.

“Inside the super hedge funds that are scaring Wall Street,” reads the headline. The following article is pretty good (it’s by Oliver Shah, so not unexpected), but ironically the peak of the multi-manager/multi-strategy phenomenon may already have been reached.

Here’s an interesting chart from a recent report from Barclays’ Prime Brokerage, forwarded to FT Alphaville by a friendly colleague:

Perhaps one can be forgiven for seeing returns fall somewhat over the last twelve months, given how choppy most markets have been and how broad, diversified, multi-manager hedge funds are not simply the “7 glorious” stocks that the Stock driven would ignore market this year.

The fact that volatility has fallen – and remains in such a narrow range – suggests that multi-managers are also keeping a tighter rein on risk. But Barclays estimates that both market-leading alpha and Sharpe ratio (return versus volatility) have fallen significantly over the past 12 months.

Sharpe’s peak of 0.8 is still good, but not really what investors expect from the 20 percent of profits and often obscene costs they must absorb in the multi-manager “pass-through” approach (Often this can be the equivalent of 4-8 percent of assets per year). And a mean Sharpe value of -0.1 is just bad.

Performance is particularly poor for smaller multi-manager hedge funds, which is not surprising. Companies like Citadel and Millennium are closed to new investors, so investors’ money has flowed to smaller competitors. However, these smaller competitors are unable to make the same investments in technology and people.

And now they stink everywhere:

© Barclays

Perhaps this is just a temporary bout of mediocrity after nearly a decade in which multi-managers were one of the hottest strategies in town. Even Citadel’s Ken Griffin warned in an FT interview earlier this year that this could not last.

The stories of markets are always stories of cycles and strategies that come and go in terms of their popularity. Apparently multi-strategy managers are currently very popular. You’re probably most popular when you’re at the peak of the cycle.

It’s too early to say for sure, but Ken could have come out on top (although there was probably a strong element of wanting to outsmart newer rivals).

Further reading:
– Across the multimanager universe (FTAV)
— Multi-strategy hedge funds are the new, superior funds of funds (FTAV)

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