Investors Agree To Unprecedented 95% "Gate" As They Hand Billion To Englander's Millennium Back in 2014, we speculated that as the market rose ever higher on ever lower liquidity and ever more central bank intervention, if and when the moment came that price discovery was permitted again, the avalanche of selling would be unstoppable ...
Tyler Durden considers the following as important:
This could be interesting, too:
Calculated Risk writes Thursday: Unemployment Claims, PPI
Charles Hugh Smith writes The World Has Changed More Than We Know
Jeffrey P. Snider writes These Idiots…
Calculated Risk writes April 8 Update: US COVID-19 Test Results
Back in 2014, we speculated that as the market rose ever higher on ever lower liquidity and ever more central bank intervention, if and when the moment came that price discovery was permitted again, the avalanche of selling would be unstoppable and the entire market would be halted indefinitely, very much as what happened to 2014's high flying penny stock CYNK.
Yet while a marketwide halt would not surprise us, what we find remarkable, is just how many investors now seem resigned, even if subconsciously, to never getting their money back after the next crash.
Case in point, Izzy Englander's multi-billion "pod-based" fund, Millennium Management, which according to Bloomberg has managed to raise $3 billion without batting an eyelid, a remarkable achievement for a hedge fund at a time when its peers suffered nearly $100 billion in outflows in 2019, just shy of the biggest annual outflow since the financial crisis.
Yet while Millennium's ease at raising money is indeed impressive (the $40+ billion fund returned less than 10% last year, a third of the S&P, but has been consistently profitable for the past decade), what we find fascinating is not only the ease with which investors handed over their money to the 72-year-old former options guru Englander, but their willingness to be constrained by one of the most draconian locks up in hedge fund history.
According to Bloomberg, which read a Feb 12 letter from the fund to investors, the share class open to new investments limits the amount clients can pull to 5% of their money each quarter, meaning it would take them five years to fully cash out. The 5% quarterly redemption limit means that in a quarter in which markets tank and investors want to pull their money, they will only be allowed to pull just 5%. In other words, Millennium investors have pre-emptively agreed to be gated to at least 95% of their capital following a "market event." And all this just to be allowed to invest in the vaunted Englander's hedge fund.
“The 5% quarterly share class will be the primary form of any new investment,” Englander wrote in the letter. A spokesman for the New York-based firm declined to comment.
One reason why Millennium has pushed such draconian terms on new investors is that it already has a line of people waiting to give it money: the hedge fund raised $4.1 billion in 2019, when it opened to new capital for the first time in two years. Now, it expects that to reach $7.1 billion by March, according to a Feb. 12 letter to investors. The total would push its total AUM to roughly $50 billion, even as its regulatory assets under management surpass $200 billion (MLP is one of "those" hedge funds that rely a lot on bank repo arrangements)
Millennium's remarkably long lock up, one which puts some private equity funds to shame, comes as Hedge funds are increasingly trying to secure investor capital over longer periods to avoid sudden mass redemptions if markets turn volatile. Millennium had withdrawals of at least $1 billion in 2008 as investors found themselves in need of capital during the financial crisis. One can argue that by effecting pre-emptive "gates" that allow investors to pull just 5% of their capital, Englander is telegraphing that the party is about to end and that investors will rush for the exits. The only problem: they won't be able to as the fine print in their contract now says.
To be sure, Millennium's brazen lock up is something that only a handful of stellar hedge funds can afford: as Bloomberg notes, "the firm’s growth shows that some big-name hedge funds with solid track records still have committed clients even as investors remain skeptical toward the industry. High fees and mediocre returns sparked accelerating redemptions industrywide last year."
The firm returned profits to investors in 2019 for the second year in a row, according to a person with knowledge of the matter, who asked not to be identified because the information isn’t public.
Ironically, most of Millennium’s new capital will come from existing clients either reinvesting gains or adding fresh cash; in other words the nearly 11 year long bull market has made investors forget what happens when there is a market crash and a panicked flight for exits. And Millennium is capitalizing on just that.
Other highlights from the letter:
- After a hiring spree, Millennium ended 2019 with “the largest number of portfolio managers in our history” -- more than 230. Much of the activity was in Europe and Asia.
- Millennium is pursuing “new types of quantitatively driven trading strategies.” As technology has advanced, the firm has worked to hire a wider array of quant managers.
- The firm has built up its infrastructure to “ingest, cleanse and curate data.” It manages more than 2,000 data sets across almost 400 providers, more than 10 trillion records of ready-to-use data and 2,000-plus terabytes of compressed stored data.