November 10, 2017 / 12:54 PM / a year ago

CORRECTED-Multi-manager hedge funds hook investors with returns recovery

 (Corrects date in paragraph 10 to 2016)
    * Citadel to return cash equal to 2017 gains - letter
    * Citadel flagship funds up 11.43 pct to Oct. 31 - source
    * Investors add $1.2 bln in first three quarters of 2017

    By Maiya Keidan and Lawrence Delevingne
    LONDON/NEW YORK, Nov 10 (Reuters) - Multi-manager hedge
funds, often star performers, have recovered from below-par
returns in 2016, with investors adding $1.2 billion to them
during the first three quarters of 2017. 
    Although traditionally they are meant to achieve some of the
best returns by running different investment strategies and
moving money between them based on their success, many investing
approaches used by hedge funds actually lost money in 2016.
    As a result, $1.8 billion flowed out of multi-manager funds
last year, industry tracker Eurekahedge data shows.
    The sector posted returns of 5.1 percent up to the end of
September 2016, data from Preqin shows, while the S&P 500 index
made gains of 8.6 percent over the same period.
    Although these funds have generated returns of 8.14 percent
on average so far to Sep. 30 this year, they have again lost out
to the S&P 500 index, which was up 12.7 percent.  
    Despite this, their improvement over last year is enabling
some firms to return profits to investors. 
    Citadel, one of the largest team-based hedge funds with $28
billion in investment capital, is among the top performers this
year, with gains of 11.43 percent in its flagship fund through
October, a source close to the firm said.
    It is now planning on returning all profits from 2017 to
investors, a letter reviewed by Reuters shows.
    Traditionally some funds want to keep funds under management
below a certain level as it becomes harder to manage assets
above that threshold.  
    A spokesman for Citadel, founded by Chicago billionaire Ken
Griffin, said it routinely returns profits, though it did not in
2016 when it made 5 percent, a source close to the firm said.
    "We have routinely made profit distributions, in whole or in
part, across a number of our funds over the past 20 years,”
Citadel spokesman Zia Ahmed said.
    Other multi-managers may not be far behind after improved
performances. Folger Hill's fund, for example, is up 4.5 percent
through end-October, according to a person familiar with the
situation, a turnaround from losing 17.5 percent last year.

    Millennium Management's International fund is up 5.54
percent in the year to Sept. 30, compared to just 3.38 percent
in 2016, according to data compiled by HSBC. Balyasny's Atlas
Global Investments fund was up 3.59 percent to Oct. 13, after
losing 0.73 percent in 2016, the same data showed.
    "Multi-strategy funds are (in general) having a better year
so far in 2017 relative to 2016," Russell Barlow, head of hedge
fund investments at Aberdeen Standard Investments, said.    
    Last year saw some firms doing particularly badly, notably
Blackstone Group's Senfina Advisors, which lost almost a
quarter of assets from performance losses and closed down. 
    "Security selection based on fundamentals is being rewarded,
equity sector dispersion has increased and interest rate
divergence has resulted in better opportunities for relative
value strategies," Barlow added. 
    Smaller funds run by Boothbay Absolute Return Strategies and
Verition Fund Management are up an estimated 11.8 percent and
9.7 percent through Oct. 31, respectively, both outstripping
2016 returns, people familiar with the situation said.
    Multibillion-dollar U.S. investor Schonfeld Strategic
Advisors made gains of 14 percent in the year to end-September,
a person familiar with the matter said.
    However, Citadel appears to be the only multi-manager so far
to have performed strongly enough to return profits.    
    But Citadel has not always performed well and asking to make
redemptions has frustrated some investors who have stuck with
them, particularly when many firms are already closed to new
investment due to their popularity.
    "I find this very sad," said one fund-of-fund investor who
received a letter to redeem capital. "Especially that we have
trusted them in 2009 ...after having had a very difficult 2008."
    Citadel's flagship funds lost 55 percent in 2008 and
investors asked to withdraw $1.5 billion. 
    Many investors prefer to keep profits from their initial
investment with a manager in order to best generate year-on-year
returns and avoid having to find a new home for their cash.
 Benchmark/Fund   2016 at Oct. 31      2017 YTD Oct. 31
 Multi-strategy   5.1 pct(to Sept.30)  8.14 pct(to Sept.30)
 S&P 500          7.5 pct              15.92 pct
 Equities         3.71 pct             10.69 pct
 Macro            0.17 pct             2.35 pct
 Hedge funds      3.59 pct             7.23 pct
 Source: multi-strategy gains from Preqin, equities, macro and
hedge fund gains from HFR

 (Reporting by Maiya Keidan; additional reporting by Svea
Herbst-Bayliss; editing by Alexander Smith)
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