The 32 hedge funds currently thriving by Ken Griffin's measure. The 32 currently not

Four months ago, Ken Griffin explained what he thinks it takes for hedge funds to attract money from investors. 

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Speaking to Goldman Sachs, the Citadel CEO and founder said that for the money to "flow in" the equilibrium return must be 4% plus the risk free cost of capital.

This year, many funds are not achieving that.

If this risk free cost of capital is determined as the rate paid on three month Treasury bills, Griffin's current hedge fund hurdle rate is around 8.2%. Based on figures from Bloomberg, the chart below shows which funds had generated year-to-date returns minus fees that were above this in the year to September, and which funds had not.

Based on Griffin's implied 8.2% hurdle, Citadel's Wellington fund will be among those favoured by investors for its performance through to September. So will DE Shaw and Point72. But other multistrategy hedge funds, including Millennium, Schonfeld, ExodusPoint, Verition, Brevan Howard, Balyasny and Walleye, will not be.

The chart below also includes single strategy hedge funds like Rokos (macro), Marshall Wace (equities), Arini (credit) and Taula (macro). They too are all below the Griffin threshold. 

After October's macro fund meltdown relating to French bonds, after the pain in credit funds as risk premiums rise, and after last Thursday's nightmare in which Barry Ritholtz says there was a "huge, leveraged growth unwind by the major multi-strategy hedge funds," which found themselves caught in a "crowded, systematic, long-leveraged growth equity trade," annualised returns may yet get far worse. 

What does this mean for portfolio managers, analysts and others who might want to work for the funds in red? In the short term, not much. Griffin said the risk free rate plus 4% is the long run equilibrium point. Funds typically have investors' money locked in and will have an opportunity to redeem themselves with improved returns in the future. 

At multistrategy firms, four to five year lock-ups are common. Millennium, for example, raised $3.7bn for a share class with a five-year lock-up in 2019, and is moving other investors onto those terms. Arini, which was down 33% to September has funds locked in for an average of two years according to Rupak Ghose. "The fund has the structural duration of capital to see these investments through to their catalysts,” said Arini founder Hamza Lemssouguer last year. 

In the long term, though, persistent low performance will become problematic. 

This year's poor performance is leading some to question how it is that so many multistrategy funds - which are supposed to make uncorrelated bets and so be immune to market turbulence - have lost money. Bloomberg journalist Nishant Kumar has suggested it was the result of crowded trades. Ritholtz reported it was "forced liquidations" as 108 separate pods were closed and unwound, resulting in the forced selling of leveraged bets after individual pods' risk limits were breached. 

In theory, individual portfolio managers sitting in independent "pods" at multistrategy funds are autonomous entities. In reality, the fund as a whole will likely operate within tighter risk limits when it's been burned. Either way, the poor performance through to September puts pressure on funds to perform better in the final months of the year and into 2027. 

If you want an easier ride, you might want to join a fund in green above the Griffin hurdle.

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