William John Market Report 10-11-21
William John analyses Millennium Capital’s shift in capital strategy and its implications for the future of the hedge fund industry.
Markets, WilliamJohn, HedgeFunds, MillenniumCapital, Capital, Funds, IndexFunds, Equities, Liquidity
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William John Market Report 10-11-21

William John Market Report 10-11-21

Category: Reports

Millennium Capital, one of the world’s most successful hedge funds, recently announced its intention to restructure its redemption plans for investors. 

One of the riskiest features of a hedge fund – a type of financial institution which attempts to “beat the market” using borrowed capital and actively managed portfolio strategies – is that of redemption. This specific risk means that hedge funds cannot commit to illiquid or long-term yielding investments. For example, if a hedge fund performs poorly in its equity portfolio and faces redemption, it will need to liquidate other investments to facilitate redemption or maintain a stable cash balance post-redemption. If these other investments are tied up in illiquid assets such as Real Estate (which often takes months to purchase or sell) then this could prompt a cash flow crisis, ultimately leading to the fund shutting down. 

During the Financial Crisis between the third quarter of 2008 and the second quarter of 2009, up to 16% of aggregate hedge fund industry capital was withdrawn, including $42 billion in Q2 2009 according to Barron’s. During this time period, Millennium Capital faced a redemption of up to half its capital during 2008 despite recording a small loss relative to the economic devastation seen across Financial Services and the wider economy in the US. Hence, it is no surprise to see the management of the fund implement measures to stabilise its capital base. 

The fund is planning to return approximately $15 billion to investors from its shorter-term share class (which allows its investors to redeem their capital within a year) whilst simultaneously raising money for a private equity style class of shares that would give them exit opportunities after 5 years. By shifting the balance of capital from short-termist investors and investment to a longer-term private equity style strategy, the fund will be able to engage in alternative and illiquid investment strategies and potentially attract more talent to its fund on the basis that the most talented traders will have more flexibility in terms of investment strategy by having a longer-term investment mandate. For example, Millennium recently recruited Akash Patel, a 17-year veteran at Goldman Sachs who was Global Head of emerging market credit trading. 

Transitioning to a more stable capital base will only further consolidate Millennium Capital’s position within the hedge fund industry judging by its returns in recent years, having made 25.6% in 2020 and 10.9% so far this year, according to the Financial Times. Compared to the S&P 500 (as a proxy for an investor holding a passive index fund representing the “market” portfolio):

Source: William John Analytics, Yahoo Finance

Holding a passive S&P 500 index fund from 01/20 to 11/21 would generate you a return of 45% before costs (minimal) and taxes. Holding a position in Millennium for the same period of time would generate you a return of approximately 36.5%, before taxes and costs (much higher, potentially 2% of entire capital amount and 20% of the profits). Judging by this, Millennium, like all hedge funds, needs to find new ways to generate returns that can compete with the rise of the low-cost index fund – often marketed by institutions such as BlackRock, Vanguard, and others. Shifting to a long-term investment strategy may support this mandate, or it may hinder it. The result however could set a new precedent for hedge fund philosophy for decades to come.  

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.