• For several well-known funds, the start of 2019 has helped wash off the stink of last year, as big-name managers like David Einhorn, Bill Ackman, Joseph Edelman and Dmitry Balyasny all finished January with positive returns.
• The overall hedge fund industry had one of the best months in its history, returning 4% on average, after declining 2.2% in December, according to data tracker eVestment.

With calls to increase taxes on the wealthiest and outrage at former Starbucks CEO Howard Schultz's presidential aspirations, 2019 has not been kind to billionaires so far.

But big-name hedge fund managers were happy to see the calendar turn from a disastrous 2018 to the new year, which has so far gone well for many in the industry. 

Dmitry Balyasny's Balyasny Asset Management, following a year where he closed his "Best Ideas" fund and laid off a fifth of his staff,  is up 3.4% after January, a source close to firm said. 

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David Einhorn's Greenlight Capital Management, which recorded the worst year in his $5 billion fund's 23-year history in 2018, is up 13.4% through January, according to a source close to the firm. 

At $7.5 billion Pershing Square, Bill Ackman had his entire 2018 returns wiped out by December, when he finished down 10.8%, pulling down returns for the year to -0.7%. To start 2019 however, his fund has notched double-digit returns of 18.3% through the end of January, investor documents show.

Meanwhile, Joseph Edelman's Perceptive Advisor's $3.1 billion flagship fund finished January up 5.5% after losing roughly 7% in December. 

On average, hedge funds returned around 4%  in January on the backs of solid long-short equity and emerging markets funds' performance, according to eVestment's global head of research Peter Laurelli. That's the highest average single month of returns in nearly 10 years, according to eVestment. 

To be clear, the broader market has also returned to its steady ways. After the S&P 500 index fell 9.2% in December, it gained roughly the same percentage in January.

Read more: Investors are asking hedge funds to move to a '0-and-30' fee model, and it's putting pressure on a big chunk of the industry

And just because a few big funds rebounded doesn't mean that it's smooth sailing for everyone. 

"While January was meaningfully positive, it was not universally so, and there are some segments still feeling pain," Laurelli said, calling out managed futures strategies specifically as an area that struggled.

He also cautioned against assuming all large fund managers have risen with the market, noting "small funds appear to have generally outperformed larger funds."

"It’s still more of an rebound story than an industry bounce back story," he said. 

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NOW WATCH: Billionaire investment banker Ken Moelis reveals his thoughts on taxes, regulation, and winning the talent war against tech

• As hedge fund managers seek out ways to beat the market, they're increasingly turning to alternative data providers to identify trends before their competitors. 
• But with information like satellite images and credit card transactions already well-used throughout the industry, some managers are wading into potentially risky territory as they seek out cutting edge data. 
• Lawyers say a few steps can protect managers, including questioning a data provider's sources. 

One hedge fund manager didn’t invest much in oil, but a data company's unusual pitch caught his eye.

The firm claimed to pinpoint which oil rigs in Texas were operating in real time, information that could be used, for a price, to make better bets on the commodity. How did the company acquire this type of potentially extremely lucrative data? It paid a guy $50 to drive around and stick sensors on oil rigs.

The hedge fund manager, who declined to be named, said he immediately passed.

As hedge funds seek out new ways to beat the market, they're increasingly looking to "alternative" data providers that offer insights into companies not found in filings and earnings calls, such as satellite images and credit card transactions. But while most data providers operate above board, the cautionary tale is an extreme example of how  traders are trying to balance the promise of getting ahead with the need to avoid using illegal information. 

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Asset managers, from traditional equity shops to quant funds, have become data managers. As they look further afield for data that will give them a trading edge, they’re increasingly wading into new, legally risky territory. Some fund managers and industry lawyers are eyeing the potential of regulations that could reshape how they source and use data.

Crackdown coming?

Last year was one the worst years for hedge funds in 20 years, as prominent investors including John Paulson, Jason Karp and Dan Och all returned money to investors after shuttering funds.

As a result, managers — especially in the stock-picking space — are under more pressure than ever to find unique datasets that will give them an edge and justify their fees.

The alternative data space is exploding.

IBM found in a 2018 report that 90% of alternative data sets available to purchase today have been created in the last two years, and AlternativeData.org puts the industry at roughly 414 providers.

With asset managers collectively spending as much as $3 billion annually on such data, according to JPMorgan, the space is starting to attract more scrutiny.  

At a recent hedge fund conference in Miami, the possibility of a crackdown in the alternative data space was a huge topic of conversation among data companies, lawyers and money managers. 

"It’s inevitable,” said Mike Marrale, CEO of alternative data provider M Science, on a panel at the Context Summits conference in Miami. This fear was shared by several hedge fund managers, who expect the Securities and Exchange Commission to bring a case against one or more investors who used data improperly.

The SEC could not be reached for comment about potential regulation in the alternative data space.

See more: A growing alternative data company helps hedge funds determine if CEOs are lying using CIA interrogation techniques

Tim Blank, the head of law firm Dechert's data privacy and cybersecurity practice, told Business Insider he's watching one pending case about data scraping from websites, which could provide investors more guidance about best practices. Blank also pointed out there’s more than just insider trading to consider including the 1984 Computer Fraud and Abuse Act; breach of contract; a website’s terms of use; and trespassing.

Multi-billion dollar hedge funds with sprawling business often have intensive due diligence screens for alternative data providers, but smaller managers hoping to scratch out returns — and keep their business alive — can find themselves playing with fire, managers say.

“If you have a good data set that’s worth money, it is probably being gobbled up by the bigger firms before it gets to us,” said Jordi Visser, the president and CIO of Weiss Multi-Strategy Advisers, which manages $1.7 billion across a hedge fund and a mutual fund.

Emerging managers can then be pushed into obscure datasets without much of a compliance staff to review them, several data providers and small managers said. 

‘It’s breaking Excel’

Funds like Steve Cohen’s Point72 Asset Management are dealing with such a massive amount of data that “it’s breaking Excel,” said Kirk Mckeown, head of proprietary research at the $13 billion hedge fund.

John Avery, Fidelity’s head of advanced analytics, said his team at the multi-trillion-dollar manager is “overwhelmed by the amount of data coming in.”

Point72 begins its data collection process first by understanding the precise information their investment team needs, rather than being pitched by data companies, said Matthew Granade, the firm's chief market intelligence officer.

Once Point72 identifies potential data partners, the firm does a technical review of the data — looking at how far back the data set goes and how specific it is — while also reviewing the source of the information by interviewing the provider, Granade told Business Insider. The firm interviewed roughly 1,000 outside data vendors last year, Granade said.

If a data provider makes it through that phase, Point72 has its investment team trial the data, which can take anywhere from a couple weeks to “many, many months” based on the complexity of the data. If a trial fills the investment team’s needs, a small team of lawyers dedicated to data review combs through it.

"We essentially demand to see every contract in the chain,” Granade said.

At Point72, only a quarter of the providers that make to the trial phase receive a contract.

Protect yourself

Hedge fund managers agree that the most critical question about data is its provenance: does the data rightfully belong to the provider to sell?

Managers, portfolio managers, and analysts need to ensure that vendors have the rights to license data to an asset manager; that they’ve made their best efforts to anonymize any personal information; and are transparent in answering a buyer’s questions about the data, said Dechert partner Jon Streeter, who has defended hedge funds and other financial institutions in insider trading cases brought by the US Attorney's office.

Firms thinking through compliance should seek providers that are as invested in following the rules as they are, Tammer Kamel, CEO of data aggregator Quandl, told Business Insider.

“You want to do business with an organization that has more to lose than you do,” he said.

Quandl, which was acquired by Nasdaq in December, hasn’t seen any suspicious data sellers, but Kamel has seen a range of hedge manager attitudes about compliance.

“There are some organizations we work with who are extremely pedantic about ensuring that everything is kosher. They ask a lot of questions, they ask for a lot of transparency, and they’re always trying to figure out the ultimate source of a data set,” he said. “There are other funds that are pretty chilled out, for better or for worse.”

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NOW WATCH: Billionaire investment banker Ken Moelis reveals his thoughts on taxes, regulation, and winning the talent war against tech

• Hedge funds and asset managers scraping the web for investment purposes represented 5% of all Internet traffic in 2018, and is expected to increase rapidly. 
• As investors look for new ways to beat the market, total spending on web scraping for investment purposes is expected to exceed $1.8 billion by 2020.

Despite information pouring in from billions of websites, poor performance plagued the hedge fund industry in 2018 — pushing investment managers to increase their already-massive web scraping programs. 

One out every 20 web page visits last year was done by a hedge fund or sell-side research institution scraping websites for information, according to a new report by Opimas Analysis. This comes out to roughly 10.2 billion page visits a day, equal to the daily users of Google's search function, and expected to "grow rapidly."

By 2020, managers' web page visits for the purpose of scraping, or extracting information from a website using an automated software program, will eclipse 17 billion and cost more than $1.8 billion — nearly double what it currently costs — as managers invest in software, talent and outside vendors to clean and store the loads of data. 

While the alternative data scene is exploding with new providers offering obscure info, research firm Opimas calls the web "the ultimate dataset."

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"In the coming few years, we will see increasing efforts on the part of investment firms to harness and leverage web data in their decision-making processes," the report says.

Hedge fund managers are pressed to find new sources of alpha-generating data wherever they can as poor performance and high fees have frustrated investors. Spending by asset managers on alternative datasets on subjects like weather trends, oil output and flight patterns is around $3 billion and growing, according to JPMorgan. 

See more: A growing alternative data company helps hedge funds determine if CEOs are lying using CIA interrogation techniques

The most prolific scrapers in the investment management space individually record hundreds of millions of web page visits a day, gathering actionable data on agriculture trends, earnings reports, transportation intel, real estate prices and more. Less than half of all web traffic in 2018 was from humans, as web-scraping bots made up 51% of the more than 200 billion web page visits per day. 

"Opimas also expects to see more firms trying to monetize their web data by reselling the information that they have gathered through web scraping by making these datasets available to other firms that might not have the necessary scale to engage in large-scale web data harvesting exercises themselves," the report reads.

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• Bill Ackman's $7.9 billion Pershing Square hedge fund lost a third of its staff in 2018, dropping from 56 employees to 38, according to an investor presentation. 
• The staff cuts, which were the first listed "strategic priority" for the firm, let Pershing become a "more focused and investment-centric organization." 
• Pershing Square has been off to a hot start in 2019, returning 24.7% through Tuesday and adding nearly $1.5 billion in assets to the fund in six weeks. 

Billionaire Bill Ackman's Pershing Square Capital Management hedge fund shed a third of its staff in 2018, as the firm looked to cut costs and shift strategies. 

The cuts are a part of the firm "returning to its roots," according to a recent investor presentation. 

Pershing, a $7.9 billion hedge fund, began 2018 with 56 employees and ended the year with 38, including layoffs, retirements, and departures that will not be filled. The firm's head count peak was at the end of 2015, when 74 people worked at the hedge fund and assets topped $18.3 billion.

The smaller staff, the presentation said, will lead to a "more focused and investment-centric organization." In a section titled "Stable Path Ahead," the presentation said Pershing now has "the right team in place to compound our capital for years without any meaningful headcount changes." 

The firm's investment team now includes eight people, including Ackman, after Ali Namvar and Brian Welch left the firm in 2018. 

Read more: It's a billionaire bounceback as Einhorn, Ackman, and Edelman all post good January returns, after a brutal 2018

The firm had its 2018 gains wiped out by a disastrous December, finishing the year down 0.7%. But Pershing increased assets by $1.5 billion in the first six weeks of 2019 and returned 24.7% through Tuesday. Going forward, Pershing's growth will come from its performance, not asset gathering, the presentation said. 

The manager will move into its Hell's Kitchen, New York, office at 787 11th Ave. in the second quarter of 2019, a year and a half after the firm originally was scheduled to leave its 888 7th Ave. office. 

A Pershing Square spokesman declined to comment further on the firm's plans. 

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• Hedge funds suffered one of their worst years on record in 2018, and they underperformed the market for years before that. Managers, however, believe that part of the blame lies with big Wall Street investors that have cramped their strategies.
• Pensions and other large investors have helped grow hedge funds from a niche offering for wealthy families to a $3 trillion industry, but they have also brought with them stricter vetting processes.
• Over the past 15 years, hedge fund portfolios have become more conservative and more concentrated in the same trades and securities, according to the hedge fund researcher Novus.

Is it worse for an investor to miss a big winner or get dragged down by an imploding fund?

The answer to this question from several hedge fund investors at a recent industry conference in Miami crystallized the steady change that has warped how hedge funds invest, market, and think about risk over the past 20 years.

"My gut instinct is to say miss the bad choices," said Brian Goldman, the managing partner at Lanx Capital, which primarily invests in smaller funds.

Jefferies' global head of advisory, Antonio DeRosa, said he and his team took pride in the fact that none of the funds they'd invested in had "blown up on us" in 25 years. The Cambridge Associates managing director Jon Hansen said his team focused on committing no "unforced errors."

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"If I miss a winner, I miss a winner, there'll be more of them to come," Hansen said. "But if I invest in something that isn't really there, then that's on me."

Pension money is flooding into hedge funds

The flood of institutional money from pensions, endowments, and foundations has helped create massive, multistrategy players like Ken Griffin's Citadel and Israel Englander's Millennium. These types of funds are hyperfocused on risk management and a diversified business model and look more like boring banks than hedge funds of the 1990s where star stock pickers made hundreds of millions on a couple of big bets, portfolio managers and investors say.

The vetting process required by these types of investors is stringent, partly because several institutional investors, like pensions, operate as fiduciaries, which means they're bound to act in the best interest of their stakeholders. This opens them up to much more legal risk if a fund tanks. Because of this change, managers have to show more than just their returns to the vetting teams at these multibillion-dollar investors. Third-party data use, cybersecurity practices, financial audits, portfolio fit, risk protections, and more are all examined by investors before selecting a strategy.

This has pulled the hedge fund industry from its roots as a counterweight to market volatility used primarily by wealthy families to a building block of multibillion-dollar pension plans' and university endowments' portfolios.

The level of due diligence has gotten to the point where industry titans like George Soros and Julian Robertson "would have a hard time passing institutional due diligence because they're too concentrated, they're too directional," said Michael Marcus, the head of manager research at the hedge fund allocator Prelude Capital.

A 2007 report from the consultancy Hennessee Group said that more than half of hedge funds' assets — 55% — at the beginning of 1999 were from family offices and wealthy individuals. Private and public pension plans held only 10%.

Today, the biggest investor in hedge funds is public pension plans, representing 22% of all assets in the $3 trillion industry, according to data from Preqin. Risk-averse insurance companies now make up a larger proportion of hedge fund assets (7%) than family offices, which control 3% of all hedge fund assets.

Less risk, more transparency

It's not an easy time to be a hedge fund with a hyperfocus on fees and an explosion in computer-based funds that can beat up to 95% of investors, according to the billionaire founder of Oaktree Capital, Howard Marks. 2018 was one of the worst years for hedge fund performance, and while 2019 is off to a good start for several big-name managers, a strong stock market has helped fuel some of the gains this year.

A smaller, more nimble industry in the 1990s had no problem cranking out eye-popping returns, data from Hedge Fund Research shows. From 1990 to 1999, the average hedge fund notched annual returns of 20% or better six times and never finished a year in the red.

In the nearly 20 years that have followed, assets in the industry have ballooned to more than $3 trillion from about $215 billion. But the aggregate hedge fund index has not finished a year with 20% returns and has actually recorded several down years, including 2018.

According to a review of more than 1,000 hedge fund portfolios from 2004 to the beginning of 2019 from the data provider Novus, managers have become less risky and more concentrated. An average hedge fund portfolio holds fewer than half the positions it held 15 years ago, dropping to 31 from 69, concentrating their investments in large securities that track closely to the market. This has cut hedge funds' average portfolio volatility, Novus said, as funds became more correlated with the overall market.

The industry has also become more transparent and responsive to the deep wallets of institutional investors. Third-party managed-account platforms — where funds are forced to provide information on individual securities held and daily performance estimates — let large Wall Street investors set different parameters for the funds they choose, said Andrew Lapkin, the CEO of BNY Mellon's HedgeMark platform.

The institutions on HedgeMark's platform demand lower fees for their investments, Lapkin said, and while some managers balk at taking fee cuts and opening up about their inner workings, the average investment on HedgeMark is $50 million.

These platforms hold roughly 10% of assets in the hedge fund industry. HedgeMark alone has more than 100 different managers, Lapkin said, and growing.

'Guilty as charged'

Marcus, of Prelude Capital, said he was "guilty as charged" for "depressing performance" of funds by using a strict vetting process.

"It's one of the existential questions of this business," Marcus said on the panel at Context Summits in Miami. "How to do you balance that institutional due diligence process, that institutional risk-management process with the ability to generate returns over a cycle."

See more:Investors are asking hedge funds to move to a '0 and 30' fee model, and it's putting pressure on a big chunk of the industry

Poor performance can also stem from longtime hedge fund managers growing "complacent," preferring to collect steady management fees on a large asset base instead of chasing returns, Goldman of Lanx Management said.

"Oftentimes, we stay at the party too long," said Goldman, who acknowledged that consultants could give the benefit of the doubt to underperforming managers they had invested with for years.

Despite Goldman's admission, emerging managers say big investors have to be blown away by smaller funds to choose them over funds run by well-known investors, even if returns from the some of the biggest funds are underwhelming.

Investors often shy away from being a third or a quarter of the total assets in a strategy, and investors, managers say, know they won't be blamed by going with a big name.

To Jonathan Angrist, the chief investment officer and founder of Cognios Capital, the manager selectors have a choice: either allow more risk and leverage in their hedge fund portfolios or lower their expectations for performance.

"The traditional due diligence structure is putting so many different requirements on funds," said Angrist, who runs a $60 million hedge fund and a $160 million mutual fund.

"They're constraining themselves out of returns."

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• Greenlight Capital's David Einhorn's annual presentation to investors called 2018 "the year we weren't right about anything."
• Greenlight, which has fallen to roughly $5 billion in assets as investors left the fund due to poor performance, finished 2018 down 34%, but is off to a good start in 2019. 
• The presentation, given at the end of January, features cartoon strips and New Yorker comics to describe the firm's feelings on different investments, like Tesla, General Motors and Brighthouse Financial.

Billionaire David Einhorn's Greenlight Capital has battled outflows and poor performance over the last several years, knocking his fund down from more than $12 billion to its current asset total of about $5 billion.

2018 was the biggest knock yet. The fund lost 34% in 2018, which Einhorn called "the year where we didn't get anything right" in a January 22 presentation to investors.

The 96-slide presentation details different investments that went awry, staffing changes, expectations for 2019 and more — all summarized by different New Yorker cartoons. 

Below is a summarized version of Einhorn's presentation with the comics that he selected. 

 A tough 2018

According to a chart in the presentation, Greenlight only finished two months with positive returns, May and October, while ending five months with returns of -6% or worse. 

Within Einhorn's portfolio, both the short and long positions lost money. Short positions in Netflix and Tesla clipped returns, and December's market rout hurt several stocks like General Motors and Brighthouse Financial that Einhorn was bullish on. 

Tesla short

Tesla's bumpy ride through 2018 — which included CEO and founder Elon Musk smoking weed on a podcast and relinquishing the chairman position after he tweeted about taking the company private — was tough on Einhorn, who shorted the stock several times in 2018.

See more: Jack Dorsey says Alexandria Ocasio-Cortez is 'mastering' Twitter, but Elon Musk is his favorite tweeter

A slide in the presentation shows that Greenlight shorted the stock after Musk settled with the SEC in late September only to see the stock price jump on the positive third quarter earnings and sales numbers. 

Einhorn will continue to have a short position on the car manufacturer in 2019, the presentation states.

Musk has railed against short-sellers out Twitter in the past, claiming they are out to get him and that "short-selling should be illegal." 

Tesla did not immediately return requests for comment. 

Loading up on GM

General Motors has begun to shift into the latest fads in transportation, like electric-only and driverless cars, but 2018 was a hard year for the long-time automaker. There were layoffs and plant closures, and the stock suffered because of it. 

See more: These are the five leaders in the self-driving-car race

Einhorn, who is still heavily invested in GM in 2019, cites the progress the company has made on automated driving technology as one of the factors for staying with the stock instead of cutting his losses.  

A spokesman for GM declined to comment. 

Greenlight's 2019 internal changes

Greenlight is undergoing some changes in 2019. The firm will begin accepting new capital starting in March, after being "closed since 2000, with six periodic capital openings." 

"We don't believe there is a risk of our assets growing too quickly (other than through better performance)," a slide reads. 

The presentation also mentions the firm's new chief compliance officer, Steven Rosen, who was previously the chief compliance officer for Citadel's Surveyor Capital unit for six years. The firm also added three three new research analysts at the end of last year, the presentation states. 

Einhorn's '2020 vision'

It's unclear if Einhorn is commenting on the 2020 presidential election in this cartoon or his own future, but one of the last slides of the long presentation lets partners know that he thinks there won't be a lot of openings for a "wise person" in the future. 

Einhorn has given money to Democrats in the past, though he co-hosted a fundraiser for the bipartisan PAC Keep America Competitive in 2012 with fellow billionaire Leonard Tannenbaum. One of his most recent political contributions in 2018, was for independent Senate Candidate Neal Simon of Maryland, who is also a financial advisor.

A spokesman for Greenlight could not be reached for comment. 

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• The 10 best paid fund managers in the world made $7.7 billion in 2018 with one fund manager seeing his fortune increase $1.8 billion last year. 
• Many of the world's biggest funds saw big returns even after stock markets performed poorly in 2018. 
• Despite the crazy figures 2018 was a tough year for funds in general with closures outnumbering launches for the third year in a row. 

Beyond the one percenters lies a realm of extreme remuneration reserved for hedge fund managers. The top 10 earners bringing in $7.7 billion in 2018.

Despite a tricky year for both stock markets and fund managers generally, some of the biggest names in the industry racked up major returns for 2018, according to the inaugural Bloomberg Billionaires Index ranking for hedge fund managers.

James Simon of Renaissance Technologies led the way. The former code-breaker's quant fund racking up an insane $1.6 billion in income last year, increasing his net worth to $16.6 billion. 

Unsurprisingly hedge fund titan Ray Dalio made the top 10 for 2018 with an income of $1.26 billion with his flagship Pure Alpha fund gaining 14.6% last year. His own fortune rose alongside Bridgewater Capital's approximate $160 billion of assets. 

Citadel's Ken Griffin was in the news after the hedge-fund manager paid a staggering $240 million for a New York penthouse, just after picking up a London mansion for $122 million. Both these figures pale in comparison to the $870 million he brought in for 2018, taking his own personal fortune to around $10 billion. 

The fourth and fifth highest earners were Two Sigma founders John Overdeck and David Siegel. Their quant fund saw each of them pick up $770 million in renumeration in 2018. 

The year was the third consecutive 12 month period that more funds closed up shop than were started, but the biggest fund managers continued to hoover up opportunities, even as the S&P 500 ended the year down 4.4%. 

Bluecrest's Michael Platt was the sixth highest earner, with $680 million. His fund returned a massive 25%. Meanwhile, David Shaw of D.E Shaw's quant/multi-strategy fund brought in $590 million. 

Element Capital Management's Jeff Talpins became a billionaire for the first time in 2018 after his fund brought in $420 million with a return of 17%.

Chase Coleman of Tiger Global Management has a venture capital arm which helped to boost his fortune to $3.9 billion after earning $370 million last year. 

In 10th position was Izzy Englander of Millennium, whose fund brought him in $340 million for 2018. 

SEE ALSO: These are the 20 wealthiest towns in the US

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• Precocity Capital, an energy-focused hedge fund that began trading in mid-2016, is closing down, sources tell Business Insider.
• Nick Tiller, a former portfolio manager for Steve Cohen's SAC Capital and Fidelity, started the fund and ran more than $1 billion as recently as last March, regulatory filings show. 

Precocity Capital, an energy-focused hedge fund run by former SAC Capital PM Nick Tiller, is closing down, according to sources familiar with the matter.

The hedge fund managed more than $1 billion as recently as last year, regulatory filings show, and began trading less than three years ago, in mid-2016. 

Tiller founded the firm after more than 10 years at Steve Cohen's SAC Capital, where he oversaw more than $1 billion in equity and commodity strategies. Past reports also note that Tiller was responsible for building out the fund's energy group.

Tiller could not be reached for comment. Absolute Return reported the news earlier. 

See more: Bill Ackman's Pershing Square says it's 'returning to its roots,' and it shed a third of its staff as a part of the journey

Last year was one of the toughest for launches in the industry, as data from Preqin show that liquidations outpaced launches for the first time since the hedge fund research firm began tracking the industry in 2013.

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Tiller left SAC in 2013 and founded a non-profit organization that consults with and invests in companies creating more sustainable energy and food practices known as Sustainable America. The non-profit had a little under $1 million in assets at the end of 2016, according to regulatory documents, and has partnered with organizations focused on reducing food waste and finding alternative fuel sources.

Tiller spoke at the 2016 Sohn Conference as a part of the "next wave" class, and his bio from the conference notes that he was a portfolio manager of an energy mutual fund for Fidelity before working for Steve Cohen, and that his family owns "hundreds of acres of farmland" in his hometown of Springfield, Ohio.

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NOW WATCH: Wall Street heavyweights set the record straight on the proposed 70% super-rich tax they say is wildly misunderstood

• Bloomberg LP is rolling out a new product that will offer its customers access to alternative datasets from more than 20 companies.
• The alternative datasets will be hosted not on Bloomberg's main product, the terminal, but instead through its growing enterprise data business.
• The alternative data industry has exploded over the past couple of years with new firms offering obscure information to hedge funds seeking a trading edge.

Alternative data is about to be normalized.

Bloomberg LP is the latest mainstream financial company to wade in to the once obscure alternative-data field with a new product that will give clients access to data from more than 20 niche firms.

The datasets will be immediately available, according to a release from Bloomberg, and will include data such as stats on drug approvals, retail foot traffic tracked through cellphones, and construction permits.

"It's not just about Bloomberg data, but really any data from a provider that wants to be hosted by Bloomberg," said Gerard Francis, the global head of Bloomberg's Enterprise Data business, in an interview with Business Insider.

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As hedge-fund managers seek out ways to beat the market, they're increasingly turning to alternative-data providers to identify trends before their competitors.

And as the data industry has grown, so have fears that regulators might crack down should they suspect hedge funds and other asset managers are obtaining information in an illegal way. Bloomberg's portal, data companies say, allows them to get their information in front of some of the largest financial institutions in the world without the extended due-diligence program typically required to onboard them.

"The market is in need of something like this," said Hazem Dawani, the CEO of Predata, a data company that analyzes geopolitical risk and is one of the companies partnering with Bloomberg. "There are so many alternative-data providers available and datasets that are available for trading firms and hedge-fund managers and all institutional traders to consume, but it is hard for these customers to be subscribing to each one of these data sets individually."

The access through Bloomberg fast-tracks the compliance and legal process for datasets like Dawani's, letting massive banks be more "nimble" in working with new data vendors, he said.

See more: A growing alternative-data company uses CIA interrogation techniques to help hedge funds determine whether CEOs are lying

The Enterprise Data business, which launched its Access Point website last year, is a quickly growing unit within Bloomberg as the company looks to shift away from its heavy reliance on selling $24,000 terminals and toward data feeds.

The data companies working with Bloomberg will also be able to grow alongside it with their access to Bloomberg's "salesforce and infrastructure," Francis said. Dawani said his sales team grew from the two people he employed to 202 thanks to Bloomberg's new product.

While Predata will share its roughly 2,000 out-of-the-box signals with Bloomberg clients, custom signals will be available only through a premium service available directly from Predata, Dawani said.

Bloomberg is OK with "providers determining what their strategy is," Francis said, but there is an expectation that the data made available on the portal deliver what the providers say they will deliver.

See also: A leaked memo shows Bloomberg reached $10 billion in annual revenue last year, and some insiders will receive a special bonus

"We would expect key datasets to be shared on the platform," Francis said.

And as those key datasets become more mainstream, longtime alternative-data players foresee a future in which they are simply known as data companies.

"Just because the technology didn't exist to measure something before, does that make it an alternative measurement?" said Greg Skibiski, the CEO of Thasos, a Bloomberg partner that tracks foot traffic in malls.

"This concept of 'alternative' isn't going to be around too much longer."

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• After initially agreeing to join Balyasny Asset Management late last year, longtime Citadel portfolio manager Nilsson Kocher reversed course and decided to return to Ken Griffin's fund, a source familiar tells Business Insider.
• Kocher helped create Citadel's global fixed income business in 2008 and worked as a portfolio manager for a decade before leaving the firm in March of 2018 voluntarily. 

Nilsson Kocher came close to running money somewhere other than Citadel — the place where he had worked for a decade — when he signed on to work at rival Chicago hedge fund Balyasny Asset Management.

But, thanks to an offer for a more senior position, Kocher decided to return to Ken Griffin's $28 billion firm in the end, a source tells Business Insider.

As 2018 hedge fund performance put the industry under a harsh spotlight, large hedge funds are working to keep their top talent in-house so they can present a stable front to demanding institutional investors. Citadel already this year has lost its a stock-picker, Jack Woodruff, who is launching his own fund that Citadel is an investor in, and one of Steve Cohen's top quants has left Point72's Cubist arm to start his own fund.

Kocher joined Citadel in October 2008, according to his LinkedIn, and helped start the firm's global fixed income business, in which he worked as a portfolio manager. A source familiar with Kocher's situation said he voluntarily left the firm in March 2018 to take personal time, and then decided to come back to the industry at the end of last year.

Kocher initially accepted an offer from $8 billion Balyasny Asset Management at the end of last year, despite the fact the manager cut a fifth of its staff at the end of 2018 due to poor performance. Kocher, a source tells Business Insider, then reneged on his commitment with Balyasny to rejoin Citadel in a bigger role: senior portfolio manager.

See more: Bridgewater, the biggest hedge fund in the world, crushed it in 2018 as most funds struggled

Kocher is based out of Citadel's Greenwich, Conn. office and is in charge of structured rates and volatility adjusted value investing on the global fixed income team. He re-started at Citadel nearly a year after he left, in early February.

While hedge fund performance took a nose dive in 2018, Griffin's Wellington fund returned more than 9% on the year. And while Citadel's equity team no longer has portfolio managers Woodruff and Adam Wolfman, who was fired by Citadel along with his team of 3 analysts, the firm has added more than 50 positions to its Surveyor equity arm in London and New York, recruiting investing talent from D.E. Shaw and others. 

Kocher did not respond to requests for comment. Representatives for Citadel and Balyasny declined to comment, 

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NOW WATCH: A $265 billion investment chief says one of the most valuable economic indicators is signaling a recession in about 18 months

• Hedge funds are crowding into industrials, according to the top equity strategist for RBC Capital Markets. Those stocks are soaring, but risks to investors are on the rise as well.
• Lori Calvasina says investors could suffer losses if Wall Street's views on industrials shift back to normal or if worries about slower economic growth increase.

The so-called smart money is piling into US industrial companies, and one top equity strategist says investors may get crushed when the sector runs out of steam.

Major hedge funds snapped up machinery and shipping companies in the fourth quarter, and those stocks have posted market-beating gains in 2019. But when a trade gets too popular, it can create major risks, regardless of fundamental merit, according to RBC Capital Markets' head equity strategist, Lori Calvasina.

"When crowded trades unwind, it tends to be painful and difficult for investors to get out in time," Calvasina said. "If the story changes, you’re vulnerable."

The chart below shows just how strong demand has been for industrial stocks. The blue bars show the extent of hedge funds' overweight or underweight positions on the sectors at the end of last year, and the orange dots compare that positioning with the norm since 2010.

As you can see, investors are drastically overweight industrials relative to history.

The consensus on Wall Street is that industrials are very vulnerable to rising trade tensions, but Calvasina said hedge funds tried to avoid those weaknesses by buying domestically-focused companies like airlines, building products makers and professional services companies.

In an interview with Business Insider, she said there's some good news: Hedge funds aren't putting all their money into just a couple of companies, as they did with the tech and internet sectors at time. But there are also signs the overcrowding is getting even worse this year, as defense and road and rail stocks are making huge gains.  

In terms of what could spur a sudden shift in industrial sentiment — the kind that could send investors fleeing for the exits — Calvasina highlights a slowdown in economic growth. Her concerns echo recent signs traders are getting worried about future growth, even amid a giant stock-market relief rally this year.

"Most of our baskets of crowded names struggled in 2016, when the growth trade last stumbled (as it appears to be doing now)," Calvasina wrote.

Economic growth is particularly critical for industrial company profits, as the sector is one of the most tightly linked to overall economic health. And while investors have set aside their fears and pushed industrials up 18% this year, Calvasina says the risks are substantial.

She says stocks in the industry are getting higher ratings from analysts than usual, while hedge funds shift an abnormal additional amount of money into the sector. Overall, Calvasina says industrials hit an all-time "overweight" high in the third quarter of last year and came down only a little in the fourth quarter.

That means the stocks could sink if analysts shift their views back to their historical norms, or if hedge funds change their positions.

On the flip side, hedge funds were underweight utilities and household products companies during the fourth quarter and reduced their positions, according to Calvasina. And those sectors have, in turn, lagged the market in 2019.

SEE ALSO: Hedge funds were still loading up on certain stocks as the market tanked in late 2018. These are their 9 new favorites.

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• Long-short equity funds, the biggest strategy by assets in the $3.2 trillion hedge fund space, have had a hot start to 2019. But investors have still pulled out billions.
• The stock-picking space has created some of the most well-known hedge fund names, but investors have begun to move away from the strategy as cheaper index products tracking the public market have grown in popularity.
• Two multi-billion hedge fund managers — Jana Partners and BlueMountain Capital Management — have already cut their long-short strategy this year. 

Stock-pickers can't seem to win. 

Traditional long-short equity funds still hold the most assets of any strategy in the hedge fund world with $758.2 billion in assets as of the end of January, according to eVestment, but have seen money flow out of their strategies this year even when performance is up.

In the first month of 2019, the hedge fund industry saw $1.7 billion leave overall, while traditional long-short funds bled $5.9 billion in net outflows, despite performance bouncing back after a disastrous end to 2018. 

Already this year, several well-known stock-pickers have gotten out to hot starts, and the traditional stock-picking space is up as a whole — nearly 6% through January, according to eVestment. Bill Ackman's Pershing Square is up 29.3% through Feb. 19, the firm's website states, after finishing 2018 slightly in the red. David Einhorn's Greenlight Capital followed a year where "we weren't right about anything" with a 13.4% gain in the first month of 2019. 

With a plethora of cheap index options and an explosion of quant funds, investors are turning away from broad and expensive stock-picking funds and searching out specialty products in more niche strategies for their active exposure. A recent note from Bernstein found that "we are rapidly moving towards a world where investment in public markets is done passively and the main expression of active investing is in private markets."

According to eVestment's report on the first month of sales this year, investors have been turning away traditional stock-pickers for roughly a year, even as performance has fluctuated. 

See more: Hedge funds went from a niche market to a $3 trillion titan, but became a victim of their own success thanks to their biggest investors

"Sentiment toward long/short equity managers turned negative shortly after elevated losses in February 2018. In the eleven months since, redemptions have outpaced new allocations nine times, accelerating into the end of last year," the report read. 

Even with returns rebounding, investors are still looking elsewhere — specifically multi-strategy and quant products. 

For funds where stock-picking is just one of several strategies run by the hedge fund, there has been movement away from the traditional equities business. In axing their long-short funds, Jana Partners and BlueMountain Capital Management have, respectively decided to focus solely on their activist strategy and credit and special situations funds. 

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• Goldman Sachs conducts a regular survey of large investment managers, and the latest version featured findings from 880 hedge funds overseeing a gross total of $2.1 trillion in stock positions.
• The firm discovered that the "density" of hedge fund holdings is the highest since at least 2002, meaning they're holding a big percentage of their portfolios in their top 10 stock picks.
• This is creating a dangerous situation for investors in the event of a severe market downturn — one that could worsen any major sell-off.

As an investor, it's one thing to have conviction in your decisions. But it's quite another to press your luck to the point where any sort of downturn can have a catastrophic impact on your portfolio.

Hedge funds are flirting with that fine line right now, according to data compiled by Goldman Sachs.

The firm analyzed the holdings of 880 hedge funds with $2.1 trillion of gross equity positions and found that a measure known as "density" is historically stretched. More specifically, Goldman found that the average hedge fund holds 70% of its long portfolio in its top 10 positions — the highest portion since at least 2002.

But why exactly does this metric matter? Because when positions get crowded like this, it leaves investors vulnerable to sharp sell-offs.

That's because, at the first sign of stress, investors jammed into the same holdings will simultaneously stampede towards the exits. And that, in turn, can make a bad situation worse when it comes to a major market meltdown — especially for those who get out last.

Read more: BANK OF AMERICA: 3 binary events will determine the stock market's fate in 2019 — here are all the scenarios and what each one will mean for you

So it almost goes without saying that — in the ominous event of a full-fledged stock-market crash— the last place an investor wants to be is piled into a crowded position. To the extent that hedge funds are still loaded up on the same popular names, the next downturn could be made worse.

With all of that established, it's worth noting that doubling down on proven winners can be a lucrative strategy when everything is going swimmingly in the market. After all, hedge funds wouldn't be cramming into those stocks with abandon if they weren't offering strong returns.

Still, it would seem to be a prudent strategy for investors insistent upon staying invested in crowded stocks to seek some downside hedges. At the very least, they could help offset the damage once the tables turn on those high-density trades.

SEE ALSO: Paul Krugman, Rick Rieder, and 47 more of the brightest minds on Wall Street reveal the world's most important charts

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• Carlson Capital portfolio manager Matthew Barkoff resigned from Dallas-based hedge fund in January, prompting a wave of redemptions, sources tell Business Insider.
• Assets at the Black Diamond Thematic fund, which Barkoff helped manage, have fallen to around $250 million from $1 billion as of August 2017. 
• Carlson lost several senior leaders in 2018, including longtime chief risk officer Michael Palys, treasurer Michael Watson, and head of fixed income Ivan Ross. 

Hedge fund Carlson Capital has been hit with client withdrawls from its long-short equity fund following the departure of one of the fund's two portfolio managers. 

Carlson's Black Diamond Thematic fund, which ended 2018 with $621 million in assets, has shed 60% of its assets since the start of the year after fund manager Matthew Barkoff resigned in January, sources tell Business Insider.

Black Diamond Thematic fund, which had more than $1 billion assets in mid-2017, represents a small portion of Carlson's overall assets — around 10% as of the end of 2018.

Barkoff did not respond to requests for comment and a spokesman Carlson declined to comment. 

Traditional stock-pickers have struggled to find a foothold in a market now dominated by quants and passive index funds, and several hedge funds, including Jana Partners and BlueMountain Capital Management, have axed their long-short equity funds already in 2019. 

The field's reputation has taken such a hit that even a strong start to the year by some of the biggest stock-picking names has not been able to stem the flood of redemptions. 

See more: It's a billionaire bounce back as Einhorn, Ackman, and Edelman all post good January returns, after a brutal 2018

Barkoff, a former portfolio manager for Steve Cohen's SAC Capital, helped found the fund 8 years ago at Carlson with fellow portfolio manager Richard Maravigilia, who is also a SAC alum. He will remain an advisor to the firm and does not have plans to join another manager, a source with knowledge of the situation tells Business Insider. 

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The Black Diamond Thematic fund was the only one of the firm's five funds to finish 2018 with negative returns, losing 0.57% for the year. In 2017, the fund dropped 22.1% and the firm's overall assets fell $900 million that year. 

Assets for Carlson at the beginning of 2019 stood at $8.1 billion, with roughly $2 billion in CLO investments and $6 billion across the five hedge funds. The flagship multi-strategy fund, Double Black Diamond, began 2019 with $3.2 billion after returning 2.62% in 2018. 

Clint Carlson also lost chief risk officer Michael Palys, longtime treasurer Michael Watson and head of fixed income Ivan Ross in 2018. 

See more: A former SAC Capital portfolio manager is closing his $1 billion energy hedge fund after only three years of trading 

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• It can be highly valuable to know what the most popular stocks are for both hedge funds and mutual funds. But knowing which companies are favored by both can be even more beneficial.
• Goldman Sachs has done the dirty work and figured out which 13 companies are loved by both hedge funds and their mutual fund counterparts.
• The so-called shared-favorites group has handily outperformed hedge fund favorites, top mutual fund picks, and the S&P 500 on an average annualized basis since 2013.

When it comes to picking stocks, it can be valuable for an investor to know which companies are most popular with hedge funds. The same goes for knowing where mutual funds are putting their money.

But Goldman Sachs has done it one better. The firm has looked at the two universes and identified the companies that find themselves in the good graces of both parties.

There are 13 such stocks, which is the most since the first quarter of 2017, according to Goldman data. Looking closer, nine companies held over from the previous period, while four made their debuts on the so-called shared-favorites list.

So what's the big deal? For starters, this cross-section of companies has generated outsize gains throughout history. Since 2013, the shared-favorites consortium has seen an annualized return of 19%, easily outpacing hedge-fund favorites (+15%), their mutual-fund counterparts (+14%), and the S&P 500 (+14%).

Read more: Hedge funds are playing with fire as they all cram into the same stocks — and their behavior could make the next market crash even worse

There's also the matter of what greater-than-normal overlap says about the market. Since hedge funds are normally equated to "smart money," and more retail-driven mutual-fund flows are referred to as "dumb money," the fact that they're both so invested in the same stocks implies a high degree of conviction.

Further, knowing which stocks are in this group can also be valuable on a contrarian basis. That's true to the degree that crowded positions end up working against investors — something that risks happening during sharp downturns.

No matter how you slice it, or end up applying the knowledge overall, there's no denying that knowing which stocks fall in the shared-favorites group is valuable.

For investors looking to replicate the strategy — or even short it — there's unfortunately no handy exchange-traded fund or index ready-made for investment. But we've done the next best thing and secured the list of shared favorites, which you'll see are largely concentrated in the information tech and communication sectors.

The stocks are as follows:

SEE ALSO: An overlooked market force is poised to have an unprecedented impact on investing over the next 10 years. Here's how traders can get ahead of the shift.

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• With thousands of hedge funds to pit against each other, large investors are using their scale and array of options to get customized products built by managers just for them.
• A quarter of newly invested money in the hedge-fund space went into separately managed accounts, or funds-of-one, where a large investor is the sole investor in a specialized fund.
• The shift has contributed to the institutionalization of the hedge-fund industry, making the space cheaper, more transparent, and increasingly competitive. 

It's the era of personalization, in which anyone can create their own soda or bomber jacket, as well as their own shampoo or running shoe — and hedge funds have not been immune.

Alternative-asset managers increasingly are being asked to create specialty products for their largest investors. More than a quarter of new money that flowed into the $3.2 trillion hedge-fund industry last year went into customized strategies offered through a separately managed account (SMA), or fund-of-one, according to research from Jefferies. In 2016, only 14% of hedge-fund investors said they would be interested in a hedge fund offered in a SMA structure, according to a FIS report. 

Over the last two years, Jefferies estimated that two out of every three hedge funds have been asked by an investor to make a bespoke product and that it is now more likely for a hedge-fund manager to have a specialty one-off product for a single, big investor than not. 

With thousands of hedge funds to choose from, investors are having funds tailor-made for them to fit their portfolio, liquidity, and risk-preference needs, Jefferies' annual state-of-the-union report on hedge funds said. 

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In these structures, a large investor is often the only investor in a fund. This gives these investors more leverage when negotiating fees and strategy requirements. 

It's another byproduct of the hedge-fund industry's biggest investors — institutional capital providers such as pensions, endowments, and foundations — warping the industry to fit their wants and needs, instead of kowtowing to hedge-fund managers, who historically have demanded high fees and little supervision. 

"Allocators increasingly go to hedge funds/alternatives managers first to solve specific portfolio needs, despite the fact there are more than 9,000 funds already in existence. We've entered an era of 'ultra customization,'" said Shannon Murphy, head of strategic content in Jefferies' prime services business. 

Cautionary tales

It is hard to say no to an investor offering to give you tens or hundreds of millions of dollars, no matter how successful your hedge fund has been. 

But there are clear drawbacks and cautionary tales of tying up all or most of your asset base with one investor. For starters, as one manager put it, you're no longer running your own business: You're a de facto employee working for a pension fund or endowment. 

And while a sudden infusion of capital can help a small fund get established, redemptions can come just as quick.

For example, Quest Partners, a New York-based manager with $1.5 billion in assets in several strategies, received a $500 million investment from Man Group in 2002, a year after starting, said Scott Valentine, the firm's head of investor relations.

Read more: Investors are asking hedge funds to move to a 'o-and-30' model, and it's putting pressure on a big chunk of the industry

With a sufficient amount of capital, the firm focused on perfecting its models and running the money it had instead of seeking out more investors, Valentine said. But the financial crisis of 2008 forced Man Group to redeem several of its hedge-fund positions — leaving Quest with less than $50 million in assets in 2010 after the firm had been running more than $600 million before the crisis.

The founder, Nigol Koulajian, was funding the daily operations of the firm after Man Group pulled out, and, to keep the lights on, the fund turned back once again to a large investor —  a large pension plan pumped money into its flagship strategy. The firm also rolled out an SMA in 2013 that has more short equity exposure for specific investors. 

"When we were unable to raise money after 2008, I said let's address the problem ... we can be interested in what they are looking for," said Koulajian. 

The end of 'supermarket' managers

But raising capital and launching a fund has become tougher. Increased costs for technology and compliance, and more competition give the upper hand to investors with capital to burn during negotiations. 

While Michael Gelband and Steve Cohen were able to raise billions of dollars for their new funds, liquidations outpaced launches last year for the first time since the fund tracker Preqin began watching hedge funds in 2003.

With investors holding the power, they're able to fund strategies that will do exactly what their portfolio needs.

Michael Graves, a former quant manager in Point72's Cubist unit, is shooting to launch his hedge fund with $600 million to $750 million this summer and is receiving backing from Paloma Partners, which helped seed D.E. Shaw and others. A former BlackRock alternative-credit manager, David Horowitz, is reportedly launching his systematic credit fund with a $300 million seed from an unknown US corporate pension plan, and the seed will mostly be managed through a separate account. 

The future of the industry is no longer "multi-strategy" but "multi-product," according to Jefferies. Large investors are moving away from dedicating part of their portfolios to hedge funds, instead slotting hedge-fund strategies into portfolio categories such as "absolute return" or "all weather." 

"The era of supermarket firms that try to be everything to everyone seems to have waned, as allocators seek a more precise match for their portfolios," the firm said. 

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• After not hosting his SALT hedge-fund conference last year, SkyBridge founder and former White House spokesman Anthony Scaramucci is gearing up for what he hopes will be another Las Vegas blowout.
• With the hedge-fund industry "in the worst shape since 2009," Scaramucci is looking to expand beyond hedge funds and attract attendees from venture capital, private equity, and corporate finance.
• Speakers this year include former Trump chief of staff John Kelly, former Obama adviser Valerie Jarrett, the billionaire Mark Cuban, and former UN Ambassador Nikki Haley.

SkyBridge founder Anthony Scaramucci used the influence he gained from the hedge-fund world to become the shortest-lived White House communications director in history, amass millions of followers on Twitter, and create enough personal fame to be cast on "Celebrity Big Brother."

But now he's ready to start moving his signature event — the annual SkyBridge Alternatives, or SALT, conference in Las Vegas — away from the $3.2 trillion hedge-fund industry.

"This year the industry is in its worst shape since 2009," Scaramucci said in an interview with Business Insider. "It's not the golden age of hedge funds right now."

The numbers bear out that out. Performance has cratered, fees have fallen, launches have dwindled — all while private-equity and venture-capital investing has boomed, which is why SALT "made a decision to bring in more venture capitalists, more business leaders."

See more: It's not enough to be 2 guys from Goldman Sachs in a room with $5 million — the bar for launching a hedge fund is rising in 2019

The speaker line-up this year has some notable names, such as Sir Michael Hintze of CQS, but also features private-equity and venture-capital titans like Mark Cuban, David Rubenstein of Carlyle, and Kai-Fu Lee of artificial-intelligence VC firm Sinovation Venture.

"I'm hoping that next year we will continue to transition away from the hedge-fund space," Scaramucci said. "I frankly have more fun with this move."

The conference, taking place at the Bellagio Hotel in Las Vegas in May, has been held every year since 2009, except for last year, when SkyBridge was trying to selling itself to Chinese company HNA. The sale was eventually nixed by the government.

There have been reports of disinterest in this year's conference from past attendees, which Scaramucci brushed aside with his usual self-confidence. He said this year there have been more institutional investors signed up to go than the 2017 and 2016 iterations. He has plans to expand the conference to other countries, with the goal of hosting a SALT in Abu Dhabi and Singapore.

"I want to attract people interested in innovation from all over the world," he said.

See more: Inside the rise, fall, rebound, and spectacular flameout of Anthony Scaramucci

Past conferences have often been headlined with a speaker with international clout, such as former Presidents Bill Clinton and George W. Bush as well as Kobe Bryant, and yet Scaramucci said he's gotten some complaints that the speaker list is underwhelming this go-round.

"They've become so jaded because we've become victims of our own success, because we've had some of the best, well-known people in the world," Scaramucci added.

He put the blame for a less glitzy speaker list partly on the "all-star hedge-fund managers" who "haven't really done that well and don't want to talk because of it," while assuring attendees that he is always on the hunt to improve the show.

"If Jesus returns to the Earth before May, I am going to try and book him for SALT," he said.

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• Eric Felder, the head of Citadel's Aptigon and global credit units, left the Chicago-based hedge fund on Thursday, sources tell Business Insider
• Citadel will close its stock-picking Aptigon unit, but a vast majority of the equity teams under Felder will be re-assigned to one of the three remaining stock-picking units, while the global credit team will report to founder Ken Griffin on an interim basis.
• Stock-picking funds have started the year hot, but investors have still pulled billions as quants and passive products have given asset allocators a different way to be exposed to equities.

Ken Griffin's three-year-old Aptigon stock-picking unit closed Thursday, as the head of the unit, Eric Felder, left the $28 billion firm, sources tell Business Insider.

Felder also ran the global credit team, which did not manage its own fund but a sleeve inside of the flagship Wellington multi-strategy fund. The PMs and analysts in the global credit unit will report to Griffin on an interim basis, while a majority of Aptigon's teams will be reassigned to one of the three remaining stock-picking teams at Citadel: Surveyor Capital, Citadel Global Equities, and Ashler Capital. 

The news of the closure was first reported by Bloomberg. 

Felder joined Citadel less than 2 years ago from Magnetar Capital, where he was the head of fundamental strategies, according to a press release from Citadel at the time. Prior to his stint at Magnetar, Felder worked at Barclays as head of global markets. 

See more: Hedge-fund manager Ken Griffin's $238 million NYC apartment shattered the US real estate record — here's a look at his record-setting properties and penthouses

Aptigon reportedly cut a third of its staff less than a year ago, totaling 49 people. 

Surveyor Capital lost one of its top stock-pickers, Jack Woodruff, at the start of this year as he peeled off to start his own fund, which Griffin is an investor in. The unit also fired portfolio manager Adam Wolfman and his team in December. In total, Surveyor has around 30 portfolio managers. 

Citadel's performance for the year has been solid, with the flagship Wellington fund returning 4.55% through the end of February, sources say. Last year, when the average hedge fund declined, Wellington returned more than 9%. 

Stock-picking has been falling out of favor with investors, however. Managers like Jana Partners and BlueMountain Capital Management have cut long-short strategies this year, Carlson Capital's stock-picking fund has been bleeding assets, and investors have pulled billions from the space. 

Citadel remains dedicated to the space, even with the axing of Aptigon, with a source telling Business Insider that there are more long/short personnel now than a year before, partially thanks to Surveyor's expansion in Europe. 

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• CQS CEO Xavier Rolet joined the $18 billion London-based hedge fund in December after taking a year off following his nearly decadelong run atop the London Stock Exchange.
• Rolet spoke with Business Insider about his growth strategy and focus on creating "bespoke strategies."

A multibillion-dollar London-based hedge fund wants to expand its presence in the United States, and it thinks customized strategies built for specific investors is the way to do it.

CQS, an $18 billion hedge fund manager founded by a billionaire who was knighted by the Queen, named a new CEO, Xavier Rolet, at the end of last year. The firm had been run by Sir Michael Hintze for its first two decades of existence.

Rolet, the former head of the London Stock Exchange, plans to focus on scaling the operations and expanding the distribution abilities of the asset manager, while Hintze focuses on the investment side as a senior portfolio manager and the firm's senior investment officer, Rolet told Business Insider during an interview in CQS' New York offices.

Read more:Stock pickers are starting the year hot, but investors still pulled billions. It shows how the hedge fund game has fundamentally changed.

And the key to growth will be evolving from offering the hedge funds that have made the firm successful and Hintze a billionaire to creating "bespoke strategies with bespoke fees" in partnership with the world's largest investors, Rolet said.

For the largest asset owners in the world to hit their return targets, they need more than the "cut and paste" approach of portfolio management, in which different strategies and vehicles from different managers are patched together to make a portfolio, Rolet said.

"The largest asset owners are increasingly looking for strategies that meet specific needs," he said. "That cannot be achieved by investment in a comingled fund to meet the risk/return objectives they have."

This level of sophistication is becoming increasingly common in the hedge fund and broader alternative-investment industry as the biggest institutional investors use their clout to demand specialized strategies. A quarter of new money that went into the quickly maturing hedge fund industry last year was invested in customized funds offered in a separately managed account or fund-of-one, according to data from Jefferies.

A bulk of CQS' $18 billion is invested in its credit strategies that Hintze is known for, but the manager has 31 strategies in total, Rolet said. The teams are forced to communicate and work with one another internally, he said, making them a better fit than other diversified hedge fund managers for an investor looking to place billions in a customized strategy because their teams are not walled off from one another.

With only 20% of its asset base coming from the United States, CQS believes it can attract return-starved pension plans with this approach. It plans to hire portfolio managers and distribution professionals in the US, Rolet said. He declined to give specific numbers on the fee structure beyond commenting that it is performance-based and that customized strategies' fees would be even more focused on performance barriers.

When making a customized strategy, the firm focuses first on what an investor's return "hurdle" is, he said, and CQS has found that once returns pass the hurdle, investors are willing to pay up.

"Asset owners are very open to sharing the gains made," he said.

For fees to not be a constant sore point between the two sides, "alignment is critical," Rolet said.

"That revolves around a partnership approach to investment solutions. We are not shy about having conversations about our remuneration. The balance of management and performance fees as part of discussions around bespoke solutions is something we are open to."

Read more: Investors are asking hedge funds to move to a 'zero-and-30' fee model, and it's putting pressure on a big chunk of the industry

The hedge fund industry is moving from "where the titans of the hedge fund world ruled the conversation to where the winners will be client-centric managers," he said, adding that he thinks the numbers back him up.

With overall industry asset growth slowing, the way hedge funds have been run "doesn't indicate a growing industry," he said. The CEO of the Chartered Alternative Investment Analyst Association, William Kelly, recently wrote in a blog post for Preqin that hedge fund managers needed "to recognize that hedge funds are no longer an asset class, but an industry wrestling with maturity and purpose."

"As the hedge fund industry moves towards maturity, it is certainly expected to grow but not at the same torrid pace that we have seen," he wrote.

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• Several portfolio managers have been cut by Citadel or resigned from the firm after the $29 billion hedge fund closed its Aptigon stock-picking unit last week.
• Two of the portfolio managers that were let go were Vincent Daniels and A. Porter Collins, who were featured characters in the Oscar-nominated movie "The Big Short" for their work at the then-Morgan Stanley owned hedge fund FrontPoint Partners. 

Citadel's most recent cuts including two hedge fund managers whose past performance nearly won an Academy Award. 

Vincent Daniel and A. Porter Collins, who were featured as characters in the Michael Lewis-inspired movie "The Big Short," were cut as part of Citadel's closure of its Aptigon stock-picking unit last week, sources tell Business Insider. They were portrayed respectively by actors Jeremy Strong and Hamish Linklater in the 2015 film about the collapse of the US housing bubble.

Daniel and Collins, who were working for the Morgan Stanley-owned hedge fund FrontPoint Partners in the run-up to the financial crisis, joined Citadel in mid-2017 after the pair had founded the hedge fund SeaWolf Capital, which reportedly closed in May 2017. Collins also represented the US in the Olympics as a rower in the 1996 and 2000 summer Olympics. 

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Other portfolio managers set to leave the firm due to the Aptigon closure include: John Meloy, an energy portfolio manager that joined from Balyasny; Bryn Harder, another energy portfolio manager; Mike Berkley, who was Aptigon's sole consumer portfolio manager; and Michael Janis. Sources say Berkley resigned the day before the Aptigon closure was announced, while Meloy, Harder and Janis were a part of the cuts. 

The portfolio managers mentioned did not respond to requests for comment. Citadel declined to comment. 

The three remaining equity teams at Citadel — Global Equities, Surveyor, and Ashler — have each received at least one former Aptigon team so far, sources said. There were less than a dozen PMs in the unit after Aptigon cut headcount by more than a third roughly a year ago, firing 40 investment professionals, sources said. 

Citadel also lost one of its top stock-pickers from its Surveyor unit this year, Jack Woodruff, who is starting his own fund that Griffin will invest in. The fund was able to retain longtime PM Nilsson Kocher, promoting him after he had accepted an offer from rival Chicago manager Balyasny. 

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