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- The hedge fund game is dominated by big players, and it can be tough for true innovators to carve out a niche. Here are eight people making their mark with new twists on fees, data, ESG investing, and more.
- Investors have questioned the hedge fund industry's high fees and recent lackluster performance — which has helped make the case for new ideas more compelling.
- Click here for more BI Prime stories.
The hedge fund industry is often slow to embrace change.
Sure, funds start and close every year, and managers tweak investment strategies and fee structures, but many have been sticking to the same basic approaches for decades.
We found eight people who are actively trying to change things up when it comes to data, fees, sustainable investments and more.
They work at places like JPMorgan, APG Asset Management, and Acadian Asset Management, among others. Some have been at their mission for years while others are just starting out, but all of them are doing something that turns conventional thinking in the hedge fund space on its head.
Jim Carney, CEO of Parplus Partners
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One of the defining traits of hedge funds is their high fees.
While the industry has been moving away from the once-common 2% management fee and 20% performance fee, hedge funds still stand out at a time when fees on retail investor-geared products are in a race to the bottom.
Parplus Partners, a New York-based volatility trading hedge fund, has come up with a different model. Jim Carney's fund trades volatility options and holds cheap S&P 500 index funds, and collects performance fees of 33% only if it outperforms the market.
"I wanted to have our interests aligned with investors," Carney told Business Insider. Carney launched Parplus in 2017 with seed capital from his former employer Ronin Capital, and has made a name for his fund thanks to the fee structure.
After starting with just $13 million, Parplus has more than $120 million in assets now, and the fund finished 2018 up 78%, according to a factsheet.
Management fees, Carney says, encourage funds to go out and raise a lot of money instead of focusing on actually managing it.
"We want to use investor money in the most efficient way," he said.
Parplus currently runs one fund, which trades options on the stock market's volatility, but is planning to roll out a fixed-income fund as well, which will have similar performance hurdles.
Basil Qunibi, CEO of Atom Investors
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Turning a data company into a hedge fund isn't always easy.
Financial Risk Management and CargoMetrics Technologies have had success transforming into hedge funds.
But there's also the case of Incapture Technologies — backed by former Barclays CEO Bob Diamond — which flamed out after a year amid investor worries about Incapture selling its proprietary technology to competitors.
But Atom Investors is different, mainly because its founder Basil Qunibi, who also started data company Novus, has always wanted to be in the hedge fund game.
Hearing Paul Tudor Jones and John Griffin speak at his alma mater, University of Virginia, helped fuel Qunibi's interest in the industry, he has said, but after a stint at Merrill Lynch he didn't find many funds that would hire him.
"I interviewed at a lot of hedge funds, I didn't get a lot of offers," he said on Ted Seides' Capital Allocators podcast last year.
Qunibi instead made his way into the industry from the investor side, working for a fund-of-funds that used to be a part of BNY Mellon, which was where he started developing the basis for Atom.
Novus was created "a little bit out of frustration," Qunibi said on the podcast, because he noticed that investors were not doing deep analysis when picking hedge funds.
"It was a big surprise to me to see that fundamental analysis not incorporated into the selection of investment managers," he said.
Qunibi said on the podcast that Novus' big value to allocator clients is helping them understand underlying skillsets of managers.
Austin, Texas-based Atom now uses analytics from Novus to evaluate portfolios and make allocations to hedge funds, and is running more than $1 billion after launching last year.
Atom started by investing in 20 hedge fund managers through separately managed accounts, and according to a media report, pledged $200 million to short-selling start-up fund Orso Partners this summer.
Jamie Kramer, head of alternatives solutions group at JPMorgan
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Hedge funds have been looking more at ESG ratings when evaluating investments. And now, thanks to one person, they're also paying attention to how their own business stacks up.
"When we first started asking 'Does the manager have an ESG policy?' we got people saying 'Do we have a what?'" said Jamie Kramer, head of JPMorgan's alternative solutions platform.
JPMorgan's platform works with roughly 100 hedge funds that clients can use to build portfolios, and it started tracking ESG metrics on the managers in early 2018.
At the time, only four hedge funds on the platform had a formal ESG plan for their own businesses, Kramer said.
Now, with the help of Kramer and her team, roughly half of the managers do, and JPMorgan hopes that will hit 75% in the next year.
To Kramer, it's a no-brainer for hedge funds, which are already tracking every other type of performance metric.
"It's being aware of what of the nonfinancial will eventually drive financials," she said.
"Once you measure something, people are going to pay attention to it," she added.
JPMorgan last year also began tracking diversity at hedge fund managers when evaluating whether they should be added to the platform, running the stats to see which ones had a significant owner or prominent investor that is a person of color or a woman.
Of the invested capital in the funds on the JPMorgan platform, 38% is with women- and minority-led managers, and a quarter of the managers are women- or minority-led.
In contrast, women and minority-owned hedge funds control less than 1% of industry AUM and represent only 13.5% of firms, according to the Knight Foundation.
Michael Weinberg, head of hedge funds and alternative alpha at APG
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In the hedge fund world, artificial intelligence and machine-learning are talked about more than they are actually used.
Funds that rely solely on those technologies to trade represent only a fraction of the industry's assets, and investors often have a hard time understanding the strategies.
But Michael Weinberg is not all talk — he's making investments in funds that are actually using the tech and has been one of the biggest drivers of bringing AI to the hedge fund game.
Weinberg, head of hedge funds and alternative alpha at APG Asset Management, was a research contributor on the World Economic Forum's paper on AI, which described it as a key part of a "fourth industrial revolution." He also helped found the Artificial Intelligence Finance Institute, where he is now on the advisory board.
Weinberg, the former CIO for the late Jeffrey Tarrant's Protege Partners and MOV 37, believes that the application of AI to finance and hedge funds is still in the first inning, but will rapidly grow once more people become comfortable with it. The most recent wave of investors using these techniques are more willing to share their processes, he said.
"Smaller and emerging managers are often quite transparent with non-disclosure or confidentiality agreements because they have to be if they are to attract investors, raise assets and grow their funds and businesses," he said.
These funds will be able to look at "5,000 stocks constantly, with 10,000 data points for each company," he said.
"They're doing it faster, cheaper, and more efficiently,"he said, and it will only be a matter of time until they are as common as the algorithmic trading funds that currently dominate the market.
Clay Gardner, co-founder of Titan
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Titan co-founder Clay Gardner wants even the smallest investors to be able to trade like a big hedge fund.
Gardner, Joe Percoco and Max Bernardy had all worked at hedge funds on either the operations or investment side before launching Titan in 2018. The company offers robo advisor-esque, 20-stock portfolios based on public filings of top hedge fund's holdings.
"It was sort of an aspirational concept," Gardner told Business Insider.
"Everyone can invest like one of these titans."
Titan Invest has a minimum investment of only $500, and has attracted $30 million in AUM from roughly 6,000 users, Gardner said.
Gardner worked for Tom Steyer's Farallon and the Blackstone-backed Carbonado Capital as an analyst and investor.
"For the types of funds we worked at, the filings were really a fantastic look into a portfolio," Gardner said.
"You could replicate that without the high cost," he said.
See more: Lone Pine Capital stock-pickers explain why they're investing in Tiffany and Nintendo and how they value 'disruptors' like Beyond Meat
The goal for the team is to eventually replicate all of the complex hedge fund strategies for the average investor, a dream that Gardner admits will be complicated compared to scraping 13-F filings.
"Fast forward 10 years, and we want our retail investors to be able to invest across all asset classes."
Carson Block, CEO of Muddy Waters Research
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Muddy Waters Research founder and short-seller Carson Block has been known for calling out companies as frauds — but recently he's also been going after the hedge funds and banks that invest in the names in his crosshairs.
He has become one of the loudest voices within finance about "amoral investing," and told a conference room full of his peers last December that short-sellers "should put the world on notice."
"The question I ask is: Should this business be running the way it is? Should it exist the way that it does, regardless of the way it generates money?" Block said at the conference.
"If the answer is no, then get the f--- out."
He targeted healthcare companies in particular, and said investors should start naming not only the executives of "scummy businesses" but the portfolio managers and analysts who continue to buy and support the companies.
Short-sellers have, in the past, claimed moral high ground, saying they are protecting the market from frauds, and Block has taken it a step further with his call to morality. He has also helped one-time congressional candidate Dan David start his own due diligence firm after David gained prominence for exposing several fraudulent Chinese companies.
See more: Activist short seller Carson Block is taking aim at 'amoral' investing practices and says it's time to 'name names'
Tim Harrington, founder of BattleFin
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Tim Harrington has made alternative data so popular that his annual BattleFin conference in New York had to find a new venue after outgrowing an aircraft carrier.
Harrington, who previously worked for Steve Cohen's SAC Capital and JPMorgan, is a co-founder of BattleFin, which has become a one-stop shop for all things alternative data.
His New York conference, where hedge funds can meet with people selling unique data sets pulled from things like satellite images and web traffic, now fills up multiple ballrooms at Plaza Hotel.
See more: Hedge-fund managers are overwhelmed by data, and they're turning to an unlikely source: random people on the internet
The company has also rolled out Ensemble, where people looking to buy data can get a marketplace of pre-vetted sellers of everything from credit card receipts to social media trends to weather projections.
And data provider Refinitiv invested in BattleFin in June— since then, a $27 billion deal has been announced for the London Stock Exchange to buy Refinitiv.
As hedge funds and corporations continue to plow money into alternative data, Harrington has built an organization and platform for it to be put to use. While the field is quickly becoming the new norm, odds are new users will need a guide to sort through it all.
See more: Hedge funds' secret sauce is obscure data like satellite images. Here's how the people in charge of spending millions on this data find the stuff worth buying.
Ilya Figelman, head of multi-asset group at Acadian Asset Management
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One of the biggest mistakes a hedge fund or asset manager can make is expanding into something they don't know.
Fixed-income giant PIMCO has struggled to find its niche in equities, while Andrew Feldstein's credit-focused hedge fund BlueMountain has cut two equities strategies within a year — and its majority stakeholder AMG just sold to Assured Guaranty.
But quant firm Acadian Asset Management managed to stick to its roots while still making a jump into the multi-asset space, and brought its already successful computer-driven strategy to the arena of some of the most well-known security pickers.
Ilya Figelman, who joined Boston-based Acadian three years ago to lead the effort, said he has recruited experts on a wide range of market topics to act as the final read for the algorithm's decisions.
They use over 200 factors to forecast prices for more than 100 potential assets across equities, bonds, currencies, commodities, and options — their way of quantifying the global macro strategies that funds like Tudor and Elliot made famous.
"We are not a black-box either," Figelman said. "We can explain this strategy and this process to investors."
The 16-person team is only running $30 million in seed capital from Acadian right now, but has been generating interest among investors after making money during last year's fourth quarter, Figelman said.
