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The world’s largest asset manager BlackRock is revamping its flagship quant hedge fund as it seeks to take on industry giants such as DE Shaw, Citadel and Millennium.
The investment group is adding stockpickers to Systematic Total Alpha (STA), its top mathematical and data-driven hedge fund, following a strategy pursued by multi-manager hedge funds that house human and computer-driven strategies under one roof.
The quant fund is also expanding fundraising efforts to challenge larger rivals after securing the three-year trading record required by many allocators to invest.
STA had $7bn in capital to invest as of the end of October — up from $5bn in August, but still a relative minnow compared with the multi-strategy firms Citadel and Millennium.
Between its launch in June 2022 and October, it returned 14 per cent on an annualised basis, net of fees: a strong performance for a three-year period, but one that STA will need to show it can maintain over a longer horizon.
STA is only part of BlackRock’s wider hedge fund business, which has about $90bn in client assets, making it one of the biggest hedge fund platforms in the world. BlackRock has increasingly been investing in its alternative asset management business, having purchased private credit manager HPS for $12bn last year.
The decision to add stocks picked by humans to the quant fund reflects how the hedge fund industry has increasingly evolved away from individual star managers running their own funds.
BlackRock does not plan to recruit from outside the group but to make use of existing employees elsewhere in its hedge fund business to help increase the stability of STA’s returns. Portfolio managers would generate returns in specific sectors in off years for the main quant strategies.
BlackRock’s best-known stockpicker is Alister Hibbert, who together with Michael Constantis manages a $10.5bn hedge fund.
The evolution of BlackRock’s quant hedge fund to include stockpicking mirrors the evolution of US rival DE Shaw, which was founded by David Shaw in 1988. While DE Shaw started out in quantitative investing, it later added stockpickers and macro traders. More than half of its hedge fund assets are now managed by humans rather than machines.
While BlackRock hopes to take on industry giants such as DE Shaw, Citadel and Millennium, STA uses a variation on a traditional “2 and 20” fee structure, which has proved a stumbling block for other hedge funds that have sought to take on the multi-managers.
Instead of imposing a 1.5 or 2 per cent fee on assets each year and 20 per cent on any positive returns, many multi-managers pass forgo an annual fee and pass on all costs including bonuses, data and technology direct to investors.
This has helped supercharge pay in the industry and sparked a talent war, making it difficult for hedge funds using the traditional fee model to compete. While DE Shaw does not charge pass through fees, it charges a management fee of up to 3.5 per cent and up to 40 per cent of profits, investor documents show.
These top firms also manage far more money than STA, giving them the financial firepower to pay star traders packages that would be difficult to emulate with a smaller asset bases. Millennium manages $81bn while DE Shaw and Citadel manage $70bn and $69bn respectively.
BlackRock declined to comment.