(HedgeCo.Net) A paradox is emerging in the hedge-fund world: some of the largest multi-strategy funds are underperforming smaller, more focused funds this year. According to reporting by Business Insider, “big?name multistrategy hedge funds have trailed the S&P 500 for the most part this year.” businessinsider.com Meanwhile, smaller fund units within these firms, often with more concentrated mandates, are posting double-digit gains and outperforming the flagships.
Key observations
- For instance, Citadel LLC’s tactical trading fund (focusing on equities/quant) was reportedly up ~10.4 % through September, versus ~5 % for its flagship multistrategy fund. businessinsider.com
- At LMR Partners, the convertibles and capital-structure arbitrage fund is up over 25 % this year, while its multistrategy brand is up only ~7.3 %. businessinsider.com
- Observers suggest that large, broad mandates may be slower to react to market dislocations and may carry legacy investments, while smaller, nimble strategies can exploit more specific themes.
Why it matters
- For institutional allocators: it raises the question of whether size and breadth are still assets, or whether nimble, focused strategies may deliver better risk-adjusted returns.
- Fee implications: Large funds feel pressure to protect assets, sometimes reducing flexibility; smaller funds may command higher fee premium for niche strategy but may face capacity risks.
- Industry trend: Firms may increasingly restructure or spin-off focused units to remain competitive; we may see a rise in “boutique within a giant” structures.
Risks
- Smaller funds, while nimble, may carry higher realised and unrealised risks due to concentration, lower diversification and possibly higher volatility in drawdown.
- When smaller strategies perform well, they may attract inflows and scale up quickly, potentially diluting returns.
- For large funds, message to investors is vital: they must show how size doesn’t impede agility, or risk losing clients to boutique rivals.
The takeaway
The hedge-fund industry is shifting. Size for its own sake is no longer a guarantee of outperformance. Investors and fund managers alike need to focus on strategy effectiveness, adaptability, and evidence that capacity is not killing performance. The winners this year may be the firms that balance scale with nimble execution and theme-specific alpha creation.