LONDON (BLOOMBERG) - The most successful idea in hedge funds is now simply strength in numbers.

Investors are plowing money into funds that do not rely on the next macro genius or star stockpicker, but instead offer an army of traders who invest in an array of strategies. These behemoths secured pretty much all of the new money in the hedge fund industry last year, cementing a tectonic shift that has accelerated since the pandemic.

Clients are increasingly willing to pay high fees - outsized even by hedge fund standards - to gain access to a whole universe of investments, from United States stocks and precious metals to Asian currencies, executed by scores of traders who can be easily replaced if they stumble.

It is a stark contrast to the old business model: Launch a fund, name it after yourself, call the shots, profit. Many managers are finding this new style more appealing - and in some cases have little choice since flashy trading stars are not in vogue with investors any more. With a shakeout under way in an industry that runs about US$4 trillion (S$5.4 trillion), multi-strats are the only way to grow.

The Great Migration

Behind their epic rise is consistent performance during periods of market chaos. Take two of the oldest and largest multi-strat houses in the world: Millennium Management and Citadel. They pool investor money into huge funds before parcelling it out in various trading strategies - all under one roof, with layers of risk management to avoid trading accidents.

A US$1 million investment in Millennium's multi-strategy pool at its launch in 1989 is worth about US$67 million now. Citadel has turned a million dollars into about US$236 million since its start in November 1990. By contrast, US$1 million invested in the HFRI Fund Weighted Composite Index at the start of 1990, when the benchmark started, would be worth US$18 million.

Millennium has suffered one annual loss over three decades of trading, dropping 3 per cent in 2008. Citadel has had two, falling by about 4 per cent in 1994 and a whopping 55 per cent in 2008, according to investor updates seen by Bloomberg. Meanwhile, more than 3,350 hedge funds have shut down in the past five years, according to Hedge Fund Research, some knocked out by market swings during the pandemic, highlighting how precarious single strategies can be.

Multi-manager platforms "have in effect become the most efficient allocators of capital", said Mr Caron Bastianpillai, who invests in a number of such funds at Switzerland-based NS Partners.

To be sure, other forms of funds still control most of the assets under management in hedge funds, at least for now. And talented individual traders can still do well, cashing in handsomely when their specialised trading tactic is in vogue. But picking top managers is a gamble in itself. Billionaire Chris Rokos' record gains in 2020 were followed by his fund's worst-ever loss of 26 per cent last year. Alphadyne, the New York-based hedge fund that had never lost money since its debut in 2006, finished last year down 21 per cent after its bond market bets imploded.

Single-minded funds can also struggle with success, as growth spurts potentially make it more cumbersome to trade in the strategy that made their name. Any attempts to force change on a star trader could spook investors.

Multi-strats, meanwhile, have a low tolerance for underperformance. With individual managers less visible to clients, those who start losing in high single digits or overextend their risk can have their assets cut at best, and at worst can be fired on the spot.

This emphasis on rigour appeals to pension funds, foundations and endowments that have gravitated towards hedge funds, often without the resources to closely track what each manager is doing. When the rest of the investment community opts for diversified multi-strats, why get on the roller coaster with a rockstar?

The obvious downside is the price tag: expensive, but worth it, for the investors that continue to flock to these funds.

Clients at multi-strat funds typically sign up for high and opaque charges called "pass through". Such charges can reach 10 per cent or more on top of incentive fees, in sharp contrast with the standard hedge fund model of paying a 2 per cent management fee and 20 per cent of profit, with even these prices falling recently. The pass-through fee covers everything from boosting employee pay (and firing struggling traders) to covering office rent and even entertainment.

Some clients are also signing away their money for years. Millennium told investors in November that it had raised a record US$10 billion for a fund that takes five years to exit fully. At least four other large multi-manager funds have changed their terms or started new share classes recently, all extending the time it takes for investors to get out.