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Hedge fund Schonfeld's crazy hiring & crazy pay

Now that Schonfeld isn't joining with Millennium, the ashes are being raked over the remains of a deal whose disintegration led to another 150 jobs going at Schonfeld and the voluntary departure of a star macro portfolio manager.

Opinions are being floated as to what went wrong.

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Schonfeld grew too fast. It expanded its assets under management too quickly. It hired too wildly. It paid too much. 

In 2021, Schonfeld employed 600 people. By October 2022, it had 900 after venturing beyond its systematic comfort zone into macro and credit. AUM soared, from around $6bn in 2021, to closer to $14bn in 2022.

As AUM climbed, Schonfeld urgently needed people to manage them. Much of the hiring happened under Colin Lancaster, the fund's head of macro strategies and author of a fictionalized account of life in a hedge fund. Lancaster, who joined in June 2021, set about building a team of 50 people.

Multistrategy hedge funds are known for paying well, but Schonfeld was ahead of the pack. When the deal with Millennium was first announced, the Financial Times quoted a prime broker who said Schonfeld had been “one of the biggest payers of sign-on bonuses.” People with sight of Schonfeld's wallet confirm this. "They were paying way above market rates," says one. "Some of the deals people were getting were insane."

How insane? Schonfeld didn't comment for this article, but it's thought the fund was offering well in excess of the standard 20% of pnl on offer to portfolio managers, and maybe even more than the 30% available at BlueCrest. Its deals were too good to refuse. Away from the stars, lowly employees were also well-rewarded. In 2022, 121 people employed by Schonfeld Strategic Advisors in London were paid a total of £50m ($63m) or an average of around  £414k per head. 

The inflated cost base became problematic when Schonfeld's returns faltered. In 2022, its fundamental equity unit returned only 3.2%, while Millennium returned 12.4%. Schonfeld adheres to the 'pass through model', whereby its costs are passed on to investors, and with returns so low and costs so high, investors were not happy. There were redemptions. Schonfeld raised $2bn from investors in spring, before still more redemptions led to it to seek a further injection of cash in the failed Millennium deal. 

Insiders say Schonfeld's pains highlight the dangers of the pass through model, and are a timely warning to other funds that use it. "The pass through model works great when you're growing your assets and your cost base, but if assets are falling and the cost base is high, a smaller number of investors have to cover the remaining costs," says one insider. "It's a very negative convex business model."

Talks with Millennium broke down after Millennium overplayed its hand and demanded that Schonfeld only manage Millennium money. Schonfeld has since raised another $3bn from investors, which Bloomberg says will be subject to a three year lock-in once invested. Schonfeld has also cut 150 jobs, including Niamh Taylor, the firm’s head of Europe, the Middle East and Africa, and Russell Hartley, head of the fundamental equities unit in EMEA. Other London exits are thought to include Amelia Lawrence, a middle office quant; and Mark Almond, who is not the singer but Schonfeld's former head of front office support and automation. 

For the moment, Schonfeld has been stablized, but other multistrategy hedge funds are looking askance at its issues. "It's a constant balancing act," says one industry insider of growing a fund. "You need to balance capital, with investing in talent and investing in infrastructure. If any of those three gets out of whack, you will have a fundamental flaw in your business. - Either costs are too high, returns are diluted, or you have inadequate capital to keep portfolio managers satisifed."

The moral of the story is that multistrategy hedge funds grow too fast and pay too generously at their peril. Schonfeld's story looks like a warning.

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Photo by Olga Nayda on Unsplash

 

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AUTHORSarah Butcher Global Editor

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