Qube Research & Technologies’ 2025 accounts, filed in September, split £2.92bn of revenue into two lines. For QRT, the London quant firm, the larger is its own costs coming back from its funds; the smaller is its performance fee.

So QRT earns one thing, a share of its funds’ gains, while the funds pay its bills through a monthly charge it calls the pass-through. Its profit is the fee it keeps, and the cost of its growth comes out of the returns its investors are shown.

No press report has printed that bill; the 2026 accounts test whether it tops the fee again.

The closing chapters settle whether 2025 was a single year or a pattern.

They give the odds, as a number, that the funds again pay more toward QRT’s costs than in fees, and name the deciding number in QRT Limited’s 2026 accounts.

Half the revenue is its own costs

The filer is QRT Limited, the UK group. I rebuilt QRT’s money from its own nine sets of accounts at Companies House, 2017 to 2025, and checked every year against its own profit line. Each one ties out, so the numbers below are the firm’s own.

What surprised me was note 4 of the 2025 accounts: the line for QRT’s own costs coming back from its funds, £1.48bn, is bigger than the performance fee, £1.44bn. Together they make the £2.92bn. Note 4 calls the larger line “other revenue” and says it “represents pass through revenue and the recharge of expenses”. I call it cost recovery.

The accounting policy, note 2.5, says how it works. “Pass through revenue is based on expenses incurred by QRT and recoverable from the Funds. Pass through revenue is recoverable on a monthly basis, when the costs are incurred by QRT”. The policy’s conditions are that QRT has incurred the cost and may recover it from the funds; none is about how the funds performed.

QRT pays its staff and its bills, and the costs are recoverable from its funds1 monthly, as they are incurred. In 2025 QRT recovered £1,476.1m of the UK group’s £1,518.4m of costs. That share, which I call coverage, was 97.2%. The funds pay nearly all of QRT’s running costs as they go.

Divide cost recovery by the fee and the funds paid £1.02 toward QRT’s costs for every £1 of performance fee they were charged.2 I call that the ratio, and it last stood above £1 in 2019, when QRT employed 125 people. Above a pound, the funds pay more toward the firm’s costs than in performance fees. The margin is thin, £32.6m on £1.44bn of fees, but it points one way.

Half of what QRT calls revenue is its own costs coming back from its funds, and in 2025 that half was the bigger one. Those costs are charged to the funds as they arise, so they come out of the returns QRT’s investors are shown. QRT’s payroll reaches its investors’ returns as surely as its models do.

BDO, QRT’s auditor, named pass-through revenue as one of two areas it tested for fraud risk, beside management override. It checked “the existence and accuracy of pass-through revenue recognition” against the signed investment management agreement between QRT and its funds. Of QRT’s two revenue lines, the auditor chose the pass-through to test.

The press reads QRT through its returns. In January, Hedgeweek, citing Bloomberg, reported that QRT’s “flagship hedge fund delivered gains of around 30% in 2025”. The 2024 accounts got the same reading from eFinancialCareers, which wrote that “Revenue in the entity more than doubled to £2bn” and put pre-tax profit at £914m. About half of that revenue, £1.07bn, was cost recovery. The returns decide what QRT earns; they do not decide what its funds pay.

The funds pay for the growth

QRT’s board, led by chief executive Pierre-Yves Morlat, names one driver for both lines. Director Marcus Knight signed the 2025 strategic report on 23 April 2026. It reads, “As the investment manager of the Funds, the primary KPI for the Group is linked to the performance of the Funds, which drive the total revenues and expenses of the Group”.

The record bears out the revenue half of that sentence better than the expenses half. Take the net fee, what QRT keeps after its sister firms abroad, entities under common control that the 2023 accounts place in Hong Kong, Singapore and Dubai, take their share. In 2023 the net fee grew 4.3% while costs grew 59.6%. Since 2022, the returns drive the fee and the firm’s size drives the costs.

Two readings would shrink that finding, and the record rules out both. If cost recovery outgrew the fee because returns fell, the net fee would have shrunk; it grew in every year from 2021 to 2025. The 2024 accounts began showing fees before the sister firms’ share, and that change lowered the ratio, so the new presentation did not make the finding. Coverage holds no fee line, and it had already jumped under the old presentation.

The firm’s size is people. The UK group employed 1,336 people on average in 2025, against 343 in 2022, and its costs went from £357m to £1.52bn. QRT’s centralized allocation grew the firm; the accounts show who paid for the growth.

The charge itself is old.3 What changed is the share the funds carry. Coverage went from 58% in 2022 to 87% in 2023, and held between 97% and 99% in 2024 and 2025, as Exhibit 1 shows. The filings do not say why 2023 jumped. In 2025, with coverage near its peak, costs rose 40.9% against a net fee up 19.5%.

A peer says outright what a pass-through means for the investor. The brochure of Tudor Investment Corporation says the staff pay it passes through “accrues regularly and will be payable whether or not the applicable Tudor Hedge Fund experiences positive trading results”. QRT’s accounting policy is less blunt and names no condition on returns; the agreement that sets the terms is not public.

A prime broker has measured what such structures cost investors. BNP Paribas data, as Hedgeweek reported, found that investors in multistrategy funds “kept just 41 cents of every dollar earned” in 2023, down from 54 cents in 2021. QRT’s growth arrived as a bill on its funds, and in three of the last four years the bill grew faster than the fee.

The profit is the fee it keeps

Walk 2025 from revenue to profit, and the cost lines all but cancel against the cost recovery above them.

The sister firms took £336.5m. That left QRT a net fee of £1,107.0m, and profit before tax was £1,052.1m, 95% of it. Almost none of the cost bill reaches the profit line.

The directors lean on the same mechanism to call QRT a going concern. They expect adequate resources “based on the net current asset position as at the balance sheet date and the Company’s pass-through mechanism”. The funds’ payments are part of why the directors expect QRT to pay its way.

What reaches the owners is the fee. The UK group paid £499.0m in dividends in 2025, against £362.5m in 2024. A strong year for the funds is a strong year for QRT’s owners, and the funds carry most of a year of heavy hiring.

A performance fee is usually struck after costs. Where it is, and a fund sits above its high-water mark, the past peak it must regain before it earns a fee, investors bear 65–75p of each pound of pass-through cost at incentive fees of 25–35%. That is the range Hedgeweek reported in September 2025 for QRT’s staff share classes, “bringing them in line with external investors”. Most of each pound of cost is the investors’.

The claim stops at the UK group’s edge. QRT Limited is not all of QRT, because the sister firms keep their share outside it. The consolidated accounts of 1751 Capital Holding Ltd, the Guernsey parent, “can be obtained from their registered office”, and no public register holds them. So the claim is the UK group’s, and that group booked £2,895.7m from the funds in 2025, almost all of its revenue.

Marshall Wace, the London peer, shows the other model. It kept a management fee, and its LLP booked £658.8m of “management fees and other income” beside £755.5m of performance fees in its year to 28 February 2025. Its other income includes research costs its funds pay. Both firms collect money their funds pay in any year; Marshall Wace books most of it as a management fee, QRT as its own costs coming back.

→ QRT’s 2024 Darktrace short, rebuilt from the regulator’s filings, Trade File No. 6 on Patreon.

Will QRT’s 2026 accounts show its funds paying more toward its costs than in fees for a second year?

Below the paid line:

• A five row replay of QRT’s own years, with our odds on a repeat as a number.

• A nine year record table of QRT’s accounts, with the ratio counted two ways for the last three years.

• A four line test for any manager’s UK accounts, run next on Marshall Wace.

• Three dated checks, each with the line that settles it.

Read more

Meiji Yasuda’s president, Hideki Nagashima, and Man Group’s chief executive, Robyn Grew, announced an expanded partnership on 26 October. Bloomberg’s headline that day read: “Meiji Yasuda Commits $1.25 Billion to Man Group.”

In other words, a Japanese life insurer plans more money for Man’s funds and Man shares bought on the market. The money is the smaller half of what Man sold. The larger half is a channel into the insurer, Man’s products and know-how one way and its yen the other, and a planned shareholder whose purchase pays Man nothing. That shareholder would take more of Man off the market than this year’s buyback has.

Dai-ichi Life, another Japanese life insurer, used the same template at M&G, the London asset manager, in 2025. The test for Man is whether a holding notice, the filing owed once a holder reaches 5% of Man’s votes, appears by 30 April 2027.

I read both companies’ announcements, Man’s latest results and trading statement, every holding notice Legal & General (L&G) has published since 2024 and M&G’s first notice on Dai-ichi, and rebuilt the arithmetic from Man’s own tables, reproducing its stated fee margin and voting-share count.

• The headlines read the sum, about $1.25bn over three years, mostly for private credit.

• The 2025 plan, as Nikkei reported it, weighed ¥150bn over about ten years, so the pace changed more than the sum.

• The shares pay Man nothing, because the 57.1m shares the stake needs would come from other holders.

• Meiji Yasuda did this at L&G, holding 5.000045% of L&G’s votes on the day it announced, with a bank’s swap behind them.

• The paid chapter settles what the commitment is worth in Man’s own fees, how the deal compares with Dai-ichi’s at M&G term by term, and our odds that the stake is built.

Source: Man Group Q3 2026 trading statement, 16 Oct 2026; H1 2026 results, 28 Jul 2026; Man Group and Meiji Yasuda releases, 26 Oct 2026.

The last row is a three-year intention, set against a book that held flat in the third quarter.

The headlines read the sum

Man’s announcement put the money first: “Meiji Yasuda intends to increase its capital commitment to Man Group’s investment strategies to JPY 200 billion (approximately $1.25 billion) over the next three years, with a particular focus on private credit.” That yen is the commitment, what Meiji Yasuda says it will invest in and entrust to Man over three years, an intention rather than money that moved on Monday, 26 October.

The rest of the release describes a relationship. Man becomes “a preferred asset management partner” and the two “will also work together to develop new products for the Japanese market”. “The financial terms of the transaction are not disclosed.” The release names Antoine Forterre, Man’s chief financial officer and chief operating officer, as the person responsible for it.

Meiji Yasuda’s own release says the partnership of February 2025 worked “primarily in private assets” and now goes “beyond private assets”, to “quantitative methods and AI” and “personnel exchanges”, including “the secondment of Meiji Yasuda employees.” Its release of that February had already promised joint research on AI and quantitative methods, so what widens now is money, products and staff more than ideas.

Nagashima, its president and group chief executive, gave his reason in Man’s release: “Man Group is an important partner for Meiji Yasuda, with extensive expertise in quantitative investment management, AI utilization, private assets, and other areas.” His list opens with Man’s quant side, while the money, by Man’s own sentence, goes mostly to private credit. Knowledge travels to Tokyo; the yen travels to London.

The photograph in Meiji Yasuda’s release places Corin Robertson, Britain’s ambassador-designate to Japan, between the two chief executives. Her line in the release was that the UK “is committed to remain a partner of choice for Japanese capital and investment.”

Hedgeweek headlined the sum, “Man Group secures $1.3bn investment commitment in Japanese insurer tie-up”; Reuters, “Meiji Yasuda to lift Man Group private credit commitment to $1.3 billion”. Man’s shares closed up 6.6% that day, at 334.4p by Yahoo Finance’s price feed, while the FTSE 250 rose 1.1%.

Monday’s close undid most of a slide from 345.0p on 13 October to 313.6p on 23 October, and by 30 October the shares had kept the day’s gain but not mid-October’s level.

Private credit, $14.1bn at 30 September, sits inside private markets, at $17.4bn Man’s smallest business line, out of $270.9bn under management. Man says the deal “supports the firm’s strategic ambitions to continue growing its private credit platform and serve large insurance clients globally”. The money lands on that line; the stake would touch every Man share.

The pace changed, not only the sum

The word doing the work in Man’s sentence is “increase”. Meiji Yasuda’s three-year programme for FY2024 to FY2026, “MY Mutual Way Phase II”, “positions asset management as one of its growth strategies”. Its release of 25 February 2025 put the first Man partnership inside a plan to grow private-asset investment by ¥600bn over those three years, and named no amount for Man. Man’s final results that month did not mention Meiji Yasuda at all.

The number in circulation comes from analysts at Panmure Liberum. Reuters’ Yamini Kalia reported on Monday: “The firms did not disclose the previous investment but Panmure Liberum analysts said Meiji Yasuda made a 150 billion yen commitment.” Nikkei’s report of 25 February 2025 gave the figure its frame: ¥50bn by March 2027, the last year of Meiji Yasuda’s plan, mostly in private debt through Man’s funds, and ¥150bn over about the next ten years, which the insurer was considering (our translation).

So the change is the pace more than the sum. Meiji Yasuda’s words, “a total of JPY 200 billion over the next three years”, come to about ¥67bn a year, against roughly ¥15bn to ¥24bn a year in Nikkei’s two figures: about three to four and a half times faster.

Man’s “increase … to” fits a total that replaces the old plan, and neither firm says how large the increase is, or how much of the ¥200bn is already invested.

Abid Hussain, an analyst at Panmure Liberum, gave Reuters the deal’s best case, and the strongest counterargument to this piece: “A large Japanese Life insurer putting its own capital behind Man’s private credit push is a useful vote of confidence as well as sticky flows.”

Two of his three claims stand on the documents. A planned stake of about 5% with a three-year lock-up is a vote of confidence, and an insurer’s three-year commitment is sticky by design. The third, flows, depends on the base. Against a private credit book of $14.1bn, in a quarter when Man’s private-market line took no net new money, $1.25bn is large. Against Man’s fee revenue, the base that decides whether Monday was about money at all, it has to be priced at Man’s own margin.

The shares pay Man nothing

The two companies describe the stake with different verbs. Man’s announcement: “Meiji Yasuda will consider the acquisition of an equity stake of approximately 5% in Man to further align their interests. Any acquisition would be in the open-market, with no new shares being issued by Man Group.” Meiji Yasuda’s: “we also plan to acquire approximately 5% of Man Group’s outstanding shares from the market.”

Robyn Grew chose a third verb in Man’s release: “The intention to acquire an equity stake reflects our shared vision for the future and further aligns the long-term interests of both companies.” Meiji Yasuda says it plans to buy, Grew calls it an intention, and Man’s own announcement says only that Meiji Yasuda will consider it. The firm with the money to spend is the more committed of the two.

Man’s second sentence matters more. No new shares means Meiji Yasuda’s cash goes to whichever investors sell, not to Man.

Man had 1,141,113,769 voting shares at 30 September, the shares in issue less the 88.2m it holds in treasury; those are the voting shares from here on. About 5% of them is 57.1m shares, roughly £191m of stock at Monday’s close.

Man is a Jersey company, and the holding notices filed with it, the TR-1 forms a shareholder sends the company, are made as a non-UK issuer’s: BlackRock’s of 17 July is marked “Non-UK”. Under the UK transparency rules, a holder in such a company owes its first notice at 5% of the votes, then at 10%, 15% and so on. So a stake built below 5% leaves no public trace, and the first sign of Meiji Yasuda’s buying may be the 5% notice itself.

The other terms bind the buyer. Any shares come with a three-year lock-up, a standstill that caps Meiji Yasuda’s holding at 19.99% of Man’s issued share capital, far above anything planned, and “orderly market arrangements relating to any future disposals”.

Grew’s “aligns the long-term interests” holds as far as the lock-up reaches: it runs three years from the agreement, to October 2029, so a holder that buys now cannot sell before then.

Meiji Yasuda did this at L&G

Two deals of 2025, by Japanese life insurers in London-listed financial firms, show how such a stake gets built. Meiji Yasuda’s at L&G was on the register the day it was announced. Dai-ichi Life’s at M&G reached its first holding notice 124 days after the announcement, at 9.6%.

On 7 February 2025 Meiji Yasuda agreed to buy L&G’s US insurance business for $2,281m and said how it would take its stake: “We plan to acquire 5% of L&G’s shares (based on voting rights …) from the market … Additionally, we plan to assign a financial institution for this acquisition and risk management.”

The bank’s role shows in the notices. Meiji Yasuda crossed 5.000045% of L&G’s votes, 294,664,836 shares, on 7 February, and notified L&G the same day. Morgan Stanley’s notice for the same day shows the bank holding 5.189306% of L&G through financial instruments. Among them is a cash-settled equity swap over exactly 294,664,836 shares, expiring on 8 February 2027.

Read together, the two filings suggest Meiji Yasuda held the votes from day one while Morgan Stanley carried the economic exposure. L&G’s completion release of 2 February 2026, when the $2.3bn cash sale closed, fits that reading: “Following completion of the transaction, Meiji Yasuda will acquire a 5% economic interest in L&G.”

Later notices in March and April 2025 show the same share count. The votes sat with Meiji Yasuda a year before the deal closed.

Dai-ichi’s deal is the closer match in shape. M&G’s announcement of 30 May 2025 made M&G Dai-ichi’s “preferred asset management partner” in Europe, said Dai-ichi “intends to acquire a c.15% shareholding”, and said it “plans to appoint a financial institution to facilitate its acquisition of M&G shares”.

Its first holding notice came on 1 October 2025, at 9.601839% of the votes. M&G announced on 19 August 2026 that Dai-ichi’s nominee would join its board from 3 September, “following satisfaction of certain conditions of the Implementation Agreement”.

Man’s terms follow M&G’s: on-market purchases, no new shares, a 19.99% standstill, a lock-up and a preferred partner. The plainest difference is the stake, c.15% of M&G for Dai-ichi against about 5% of Man for Meiji Yasuda.

Both cycles turned in the same order, the announcement first, the stake on the register second and, at M&G, the board seat third. Man is at the first step. Four days on, Man’s announcement feed shows nothing after the partnership release, and no holding notice naming Meiji Yasuda. That says nothing yet, because only 13.9m Man shares traded from 26 to 30 October, by Yahoo Finance’s data, far short of the 57.1m that 5% needs.

What Man’s announcement lacks is the sentence both earlier deals carried: no financial institution is named to buy the shares or to carry the risk.

→ A bank’s swap book at its worst, Archegos’s in 2021, rebuilt from the SEC complaint and the Credit Suisse report, Trade File No. 3 on Patreon.

What is Monday’s deal worth to Man whether or not Meiji Yasuda’s stake reaches its register?

Below the paid line:

• Exhibit 2: Dai-ichi’s deal at M&G against Man’s, term by term, with the channel each sizes.

• Three numbers on the buyer: the stake in shares, against Man’s buyback and its daily trading volume.

• The commitment’s fee value, worked from Man’s own fee table, and what the 26 October move priced.

• The verdict with our odds, the line that proves it wrong, and three dated checks.

Read more

In March 2026 Seth Platt moved to fire Two Sigma’s co-chief executive, Carter Lyons, the firm’s filing says. Platt was co-founder David Siegel’s representative on the two-person management committee; co-founder John Overdeck sent the firing to dispute resolution. On 27 October Bloomberg reported that Two Sigma is exploring a minority stake sale to end the deadlock.

The tie-break seat, a third shareholder able to break the founders’ ties, also buys a share of Two Sigma’s earnings; on the one investor contract that prints its fees, those earnings are mostly incentive pay, which a weak year shrinks. I would pay no more per dollar of assets for the seat than buyers of a stake in rival Millennium paid in 2025; a Two Sigma stake price reported above that rate by 30 April 2028 would prove me wrong.

The investor is Hamilton Insurance Group: in 2025 its Two Sigma fund made $616.9m before fees, and Two Sigma took $315.9m. The manager kept slightly more of the year’s profit than the investor, and the seat’s price sets what ending the feud costs the founders.

I read every private fund in Two Sigma’s March filing until they added up to the filing’s own total for its pooled vehicles, and six years of Hamilton’s accounts. Five findings in those documents set the seat's price.

• Two votes and no tie-breaker: the founders’ splits go to an arbitrator, at least four times so far; the seat would replace it with a vote.

• An $80bn firm, a $233bn book: once the funds counted twice are taken out, the gap between the two counts is leverage.

• A third belongs to insiders: Two Sigma and its people own 33.0% of the funds’ gross assets, and none of the largest fund.

• Half the profit, mostly incentive: on Hamilton’s contract Two Sigma took 49.8% of six years’ profit before fees.

• The price, three ways: what each 10% of Two Sigma is worth, from a rival’s sale, a founder’s divorce and a stake holder’s marks.

Two votes and no tie-breaker

Two Sigma Investments is run through its general partner, Two Sigma Management, LLC, whose co-chairmen are the two founders. The filing lists their revocable trusts as owners of between 25% and 50% each, both since January 2008. Investing.com, citing Bloomberg, wrote that the two hold roughly equal halves of the management company, though the filing puts each trust below half. Lyons has been co-chief executive since September 2024.1

The two-person management committee decides, and the filing records that it cannot agree who the chief executives are. “There is disagreement about whether, when designated, an Executive Manager becomes a co-CEO or whether the appointment of a co-CEO requires approval by both members of the Management Committee.” Platt then moved against Lyons, “given his view that Mr. Lyons undermined his authority as Executive Manager”, and the filing gives Overdeck’s answer:

“Mr. Overdeck believes Mr. Platt’s actions in this regard are imprudent and baseless and has placed the termination into dispute resolution, which means that the termination cannot take effect without Management Committee agreement or resolution through arbitration.”

Either side can freeze what the other starts, and an arbitrator breaks the tie. Hedgeweek, citing Bloomberg, reported that at least four disagreements have gone to arbitration. Platt himself is leaving once a successor is found, Hedgeweek reported on 20 October, citing Bloomberg.

Overdeck put his own priority on the record in his divorce trial, reported on 3 September: “Maintaining voting parity with Dr Siegel is a principal concern”. The filing’s matching ownership ranges show the parity he means, set by trusts we argued in September were built so no life event at either man could move control. A tie-break seat keeps the founders level with each other and hands the deciding vote to someone else.

How a minority stake would cast that vote has not been reported. Investing.com, citing Bloomberg, reported preliminary talks with a Middle Eastern investor and a US pension fund, and a lean toward selling to an existing limited partner in Two Sigma’s funds. Hedgeweek gave a timetable of 12 to 18 months and no stake size or price; the firm declined to comment.

Hamilton put the deadlock’s cost in its 10-K for 2025: “These disagreements have affected Two Sigma’s ability to retain and attract employees (including very senior employees)”. Its 2023 commitment to Two Sigma could be ended by either side if Siegel or Overdeck ceased to be involved in managing Two Sigma, or if more than 25% of the voting interests passed to outsiders in a deal that changed control.

The agreement that replaced it on 1 April 2026, two weeks after Siegel named Platt, names neither founder and turns that change in control into a notice. Hamilton’s 8-K says the old one held “certain withdrawal rights that are not contained in the Investment Agreement”. It also drops the rolling commitment periods, so Hamilton needs no special exit: it can withdraw for any reason, quarterly above its minimum and at most a twelfth a month below it.

An $80bn firm, a $233bn book

Item 5.F of the filing reads $232.8bn of regulatory assets under management, and Item 5.D puts $229.37bn of it in pooled vehicles. The SEC’s instructions say what that counts: “Include the entire value of each securities portfolio … Do not deduct any outstanding indebtedness or other accrued but unpaid liabilities.” The figure is gross assets, before any borrowing or short sale is netted off.

Two Sigma counts itself differently. It “and its affiliated investment managers had approximately $80.0 billion in assets under management as of April 1, 2026, which includes employee and proprietary capital,” a Blackstone fund’s SEC filing of 29 July 2026 says. Bloomberg’s $85bn sits near that count. The regulator’s gross figure is about 2.9 times it.

A sceptic would call the gap double counting, since Two Sigma’s funds invest in one another and a gross total could count a dollar in a feeder and again in its master. If so, stripping out the layers would bring the total down toward the firm’s own count.

Schedule D lists all 62 private funds and their gross asset values at 31 January 2026, the read we taught on Renaissance and Citadel. Added straight, they come to $310.86bn, more than the filing’s own total; that raw sum is the pitfall. The 24 feeders that name a master invest in it, so their $47.22bn is counted twice. Eight vehicles hold stakes in the “Portfolio, LLC” trading funds, so their $33.98bn comes out too. Without both, $229.65bn is left, about 0.1% above the pooled-vehicle total.2

The de-layered total lands on the filing’s own figure, not near the firm’s count, so the gap is leverage: borrowing and short sales the gross count does not net off.

Millennium was about Two Sigma’s size when it sold its stake: Reuters put it at “more than $79 billion”. On the regulator’s gross line Millennium reports $720.8bn, about 6.6 times even the larger $109.7bn of client net assets its own brochure counts at year-end, so Two Sigma’s is the lighter gross-up. Leverage says nothing about whose money it is, and Schedule D answers that too.

A third belongs to insiders

Schedule D asks a second question of each fund: how much of it the adviser and its “related persons” own, the filing’s term for the firm, its founders, its staff and its affiliates. On the de-layered base they own $75.90bn of it, or 33.0%. The base is gross assets; the filing prints no insider share of capital.

Source: Two Sigma Investments Form ADV Part 1A, Schedule D, filed 31 Mar 2026 · as of 31 Jan 2026

The last row is our computation and excludes the feeders and holding vehicles. Read down the last column: Two Sigma’s people own nothing of Absolute Return or Active Extension, while the Equity Portfolio is nearly nine-tenths theirs.

An outside client in Absolute Return, the largest fund and in Hamilton’s words “a diversified, global, equity market neutral portfolio”, therefore invests where the firm’s own people do not. Two Sigma’s brochure says only that its own funds “often have the most attractive risk-reward profiles”.

Five vehicles, most with space names, are the reverse. Two Sigma and its people own all of them, $14.16bn, nearly a fifth of what insiders own.

A stake in the management company buys a share of what these funds pay the firm; the assets stay the funds’.

Outside clients pay for a process they cannot inspect. Pennsylvania’s Public School Employees’ Retirement System said so in a 2016 memo on a Two Sigma fund. “As an investor, there is limited transparency into the models, how the models are assembled to construct a portfolio, or individual portfolio holdings.” Hamilton’s filings cannot show the models either, but they print the bill.

Half the profit, mostly incentive

A buyer’s comfortable assumption about a hedge fund firm is a steady fee annuity, which predicts that the management fee dominates the take, the fee plus the incentive allocation. Hamilton’s contract tests it.

Hamilton invests through Two Sigma Hamilton Fund, LLC, which Two Sigma Investments manages; call it the Hamilton fund. It had $2.18bn of net assets at 31 December 2025, about 2.7% of Two Sigma’s own count.

Since 1 July 2023, Hamilton’s 10-K says, Two Sigma has received “a management fee of 2.5% of the non-managing members’ equity in the net asset value of the TS Hamilton Fund per annum”. It also takes an incentive allocation of “30% of TS Hamilton Fund’s net profits, subject to high watermark provisions”, plus 25% of “Excess Profits”, defined as “the net profits over 10% for such fiscal year”.

The July 2023 recut leaned further toward incentive, cutting the fixed fee from 3% and starting a larger extra allocation at a 10% year instead of 15% (10-K for 2023; S-1).

In 2025 the Hamilton fund made $616.9m before any fee. Two Sigma’s fee was $52.6m and its incentive allocation $263.3m, a take of $315.9m. That is 51.2% of the profit, and 83.3% of the take was incentive. Hamilton still kept a 16.0% return after all fees, while Two Sigma’s take came to about 16% of the fund’s average net assets: manager and investor took about the same slice.

Over six fiscal years, FY2020 to 2025, the fund made $1,902.2m before fees and Two Sigma took $948.0m, or 49.8%. Incentive was 68.8% of that take, blending two sets of terms: 50.5% in 2020 to 2022, before the recut, more since. In FY2020 the fund lost $11.7m before fees, and Two Sigma still took $74.4m. The incentive accrues quarter by quarter, so a year that ends in a loss can still pay it.

The terms move the take in a fixed order:

1. The fee is charged on the fund’s value whatever it returns, so it barely moved.

2. The incentive is charged only on profit above a high-water mark, so it swings: in 2023, a 7.6% year after fees, it was $21.5m.

3. So the take follows the result: $66.7m in 2023, against $315.9m in 2025.

The annuity assumption fails on this contract. The other Two Sigma client contract on file, a Blackstone sub-advisory agreement, leaves its fee appendix blank.

The year in progress pays more on a slightly lower return. Hamilton’s 10-Q for the first half of 2026 shows the fund up 9.6% after fees, against 10.1% a year earlier. Its incentive allocation was $194.5m, against $180.7m.

On 19 October a Two Sigma spokesperson said: “Our team is focused on delivering for our investors, with 2026 shaping up to be one of the strongest years in Two Sigma’s history”. On Hamilton’s numbers a strong year is mostly incentive.

Outside money is still arriving. Form D filings for Titan, Aurora, Beacon Fund and Beacon Bridge show $2.67bn raised since May 2025, about 3.3% of Two Sigma’s own count, though a Form D counts gross sales only. Some has left: New Mexico’s pension fund PERA pulled about $100m in June 2026, and a major investor left in 2023 amid the feud and was later replaced, Hedgeweek reported, citing Bloomberg.

Investing.com, citing Bloomberg, reported at least one allocator demanding guaranteed priority access for more capital. Millennium’s 2025 sale was, in its email to staff, “a minority, passive equity interest”; a seat built to cast the deciding vote cannot be passive, and that allocator would also be buying a place in the capacity queue.

The same arithmetic reaches every founder-owned firm that sells a slice of itself, as Millennium, Brevan Howard and Verition did in 2025: a firm that earns most when it wins sells its best year at a discount.

→ Long-Term Capital Management’s 1998 bond book, rebuilt from the regulators’ reports, Trade File No. 1 on Patreon.

What is each 10% of Two Sigma worth on its own documents, once its incentive pay is priced?

Below the paid line:

• The verdict: what a stake in Two Sigma is worth, the judgement behind it, and our odds a price prints

• A rival’s price per dollar, a founder’s divorce and a stake holder’s marks, each worked to the firm

• Hamilton’s six-year fee table, and every recent stake sale, with the three that printed a price

• What to watch: three dated filings and the figure each one tests

Read more

Schonfeld’s London office filed its 2025 accounts on 16 October: a £155.2m bill, charged at cost. It goes to Schonfeld’s New York adviser and, through it, to the funds’ investors. The office is one of the portfolio managers that trade Schonfeld’s funds.

The press files Schonfeld as a pass-through shop. A pass-through bills a manager’s costs to investors at cost, and in its full form it replaces the management fee. Schonfeld’s open funds run what a Barclays study calls a partial pass-through: a management fee, with every client also paying its portfolio managers on top, and some clients carrying the firm’s overhead too.

Pricing Schonfeld by its fee misses that bill.

I read all eight years of Schonfeld’s London accounts, its brochure and four years of its fund filings; the four parts of London’s 2025 bill add back to its turnover, the accounts’ word for the bill.

Five chapters make the case:

• The brochure keeps a 0.75% to 2% fee, and a Barclays study sent to the SEC names the structure.

• London’s 2025 bill comes apart into staff, its 11 members’ share and running costs, all at cost.

• Money left in 2023 while London’s bill rose; by end-2025 outsiders held about 85% of the flagship, Strategic Partners.

• Point72’s London arm books $323.7m of pass-through fees beside its management fee.

• What one office’s bill equals against the two main funds, the flagship and Fundamental Equity, and what it did in the year money left.

Source: Author’s calculation from Schonfeld Strategic Advisors (UK) LLP accounts, FY2020–FY2025, Companies House · as of 31 Dec 2025

Staff are average headcount; the bill rose with headcount in every year shown.

Not instead of the fee

eFinancialCareers wrote in November 2023 that “Schonfeld adheres to the ‘pass through model’, whereby its costs are passed on to investors”. Hedgeweek’s account of Bloomberg’s 2025 tally of pass-through charges named Citadel, Millennium, Balyasny, ExodusPoint and Point72; Schonfeld did not appear.

The New York adviser, Schonfeld Strategic Advisors LLC, prices its funds in Item 5 of its brochure, the Form ADV Part 2A disclosure it files with the SEC, dated 1 July 2026. For funds “generally available for subscriptions”, “the Advisor charges a management fee ranging from 0.75% to 2% (depending on the applicable class of ownership interest)”, plus a performance allocation, the firm’s share of gains, of 12.5% to 22.5%. Some classes may pay neither, and fees can be waived.

The label turns on one sentence in the same item. “The management fee and performance allocations described above are in addition to the fees and performance-based compensation charged by Portfolio Managers who manage the funds’ assets.” Item 6 makes it universal. “For all clients, Portfolio Managers (including Internal Portfolio Managers) are paid performance-based compensation, which is directly or indirectly borne by clients whose assets are managed or traded by such Portfolio Managers.”

So every client pays its portfolio managers on top of anything it pays the firm. The rule travels to any pod shop: read the expense section before the fee table, because “in addition to” there makes the fee one line of the price.

AIMA, the industry body, sent the SEC a Barclays study of how multi-manager funds charge with a September 2022 letter.1 Of the multi-manager funds reviewed, 26%, with 55% of the assets, ran a full pass-through with no management fee. A further 37%, with 30% of the assets, ran a partial pass-through: performance-based portfolio-manager pay and strategy expenses passed through, with a management fee for infrastructure. Schonfeld’s brochure describes the partial kind of the pod-shop pay deal.

A full pass-through does exist at Schonfeld, in one corner: “Investors in certain classes of one private fund do not pay a management fee and instead are allocated the expenses of the Advisor and its affiliates”. The brochure does not say which fund, or how large those classes are; call them the expense class.

The firm’s own wording goes further than its fee table: “The expenses of the Advisor are generally borne by its non-management-fee-paying clients and certain management-fee-paying clients”. Another spreads the affiliates’ costs wider: “Expenses of the Trading Vehicles, the Portfolio Managers and the Advisor’s affiliates are borne by non-management-fee-paying and management fee-paying clients of the Advisor, as applicable.” The trading vehicles are the accounts most client money trades through.

So the firm’s overhead and other staff’s bonuses fall on clients that pay no management fee, the expense class among them, and on “certain” fee-paying funds. The objection to “on top” is that for some fee payers the fee itself pays those costs:

All or a portion of the management fee compensation payable by certain management-fee-paying funds […] will be used by the Advisor to offset expenses incurred by the Advisor and its affiliates.

Which fee payers bear which costs is set in offering documents that are not public. The objection holds for overhead, at a size the firm does not publish, and fails for the portfolio managers’ pay, which Item 6 puts on all clients.

The brochure names the temptation, an “incentive to allocate expenses to non-management-fee-paying clients instead of management-fee-paying clients who do not bear such expenses.” That choice sits with the adviser: expenses are “allocated in the discretion of the Advisor or relevant Manager”.

Steven Schonfeld founded the firm, and the adviser “is owned 100% by three trusts for the benefit of Steven Schonfeld and/or his family”. Ryan Tolkin, chief executive since 2021, runs it with an Executive Committee that “functions similarly to a board of directors” but has no direct decision-making authority over client accounts.

London bills at cost

The brochure lists Schonfeld Strategic Advisors (UK) LLP, the London office, among the affiliates that “act as Portfolio Managers”. Its accounts say its portfolio managers “primarily invest in the European markets”, sub-advising “a portion of the capital of the funds” for the New York adviser. That adviser’s subsidiaries are London’s two designated members, the members legally responsible for its filings.

Two of London’s documents say how it is paid. Note 1.3 of the accounts says so plainly. “The LLP employs an expense-based pass-through model and does not receive a management fee or any other asset-based fee.” Its MIFIDPRU 8 disclosure, the statement the FCA’s disclosure rules require, published in September 2025: “SSA UK grows revenues by increasing the underlying asset base on which it charges a management fee via a ‘pass-through’ model in reimbursement of expenses.”

Both describe the same money, London’s bill: a reimbursement of its expenses, which the regulatory filing calls a management fee and the accounts a sub-advisory fee, and which the accounts say is not charged on assets. Under the funds’ offering documents it includes “performance-based compensation charged by the SSA UK’s portfolio management teams, salaries, operational and overhead expenses”. London’s share is sized by “a methodology that the LLP, in its sole discretion, believes to be fair and equitable”.

The 2025 bill comes apart into the lines that make it:

1. Staff: £97.2m, for an average of 192 people.

2. The 11 members’ profit share: £29.8m.

3. Rent and the rest of administrative expenses: £28.9m.

4. Less sublease income and interest received: £0.7m.

£97.2m + £29.8m + £28.9m − £0.7m = £155.2m, the turnover in the accounts.

That bill holds both layers of the partial pass-through. The pay of London’s portfolio-management teams comes on top of the fee for every client whose money they trade (Item 6).

London is both an affiliate and a portfolio manager, so its overhead and members’ share can sit in either layer. Where they count as affiliate expenses, the expense class and “certain” fee payers bear them, and some fee payers have them offset by their fee. All but £5.7m of the members’ share is charged as an expense; that £5.7m stayed in the partnership’s reserves.

Tolkin was a guest on the Generating Alpha podcast, as eFinancialCareers reported on 5 January 2026. “We have tons of people today who used to spend a lot of time organising data.” … “If programmed effectively, that can be done in a fraction of the time.” London’s 2025 accounts, closed before the remark was reported, show operations staff up from 26 to 33. Technology went from 30 to 34. The remark is a forecast about the work; the accounts are a payroll, and the 2026 accounts will test it.

Money left in 2023; London’s bill rose

In 2023 Schonfeld held talks with Millennium that broke down. eFinancialCareers reported that November: “There were redemptions.” It added that “Schonfeld raised $2bn from investors in spring, before still more redemptions led to it to seek a further injection of cash in the failed Millennium deal.” London’s bill rose that year anyway, from £88.8m to £116.7m.

Each year’s Form ADV Part 1, the registration form an adviser must update at least once a year, asks in Schedule D what share of each private fund is “beneficially owned by you and your related persons”. Those are the firm, its owners’ vehicles and its staff. Four copies give four year ends for the flagship’s onshore fund.2

Source: Form ADV Part 1, Schedule D, Schonfeld Strategic Partners Fund LLC, as filed 29 Nov 2022, 20 Sep 2023, 10 Jul 2024 and 30 Sep 2026. Each is a mid-year amendment carrying the prior annual update’s fund rows · 2021 and 2022: onshore investors only

On the later basis the related persons’ share rose from 8% at end-2023, so outsiders held about 85% by the end.3 The two earlier copies counted onshore investors only, so they cannot be set beside the later two.4

The form cannot show the family taking money out. Its measure counts staff, and the family’s holding company, SGH, also invests directly, “within the same Trading Vehicles as assets of non-affiliated clients”.

One insider told the site that November what falling assets do to a pass-through shop: “The pass through model works great when you’re growing your assets and your cost base” … “but if assets are falling and the cost base is high, a smaller number of investors have to cover the remaining costs” … “It’s a very negative convex business model.” Joel Litman and Rob Spivey of Valens Research put it more briefly that month: “Costs don’t drop in line when assets do, so a gap is created.”

How rivals pay London

Three rivals run London partnerships too, each paid a different way. Point72 Europe (London) LLP booked $323.7m of pass-through fees in 2025, a line that “equals the total pass-through eligible expenses the Partnership incurred during the year”, beside $71.2m of management fees and $57.2m of performance fees.

Point72’s brochure says the same thing outright: an advisory fee of 1.50% to 2.85% a year of net asset value, and “There is no limit on the amount of Pass-Through Expenses that may be charged to the Point72 Multi-Strat Funds”.

Balyasny Asset Management (UK) LLP is paid a service fee “based on the residual profit-split model, subject to a cost reimbursement floor”, on 2025 turnover of £558.3m. ExodusPoint Capital Management UK, LLP nearly doubled its advisory revenue in 2025, to £423.3m. Its 15 members kept £221.9m of it, about half.

Schonfeld’s London is paid its costs, its members’ share included: £29.8m for 11 members, about a fifth of the bill. The difference is how each firm pays its London partners, not whether investors pay for London: at fund level, all four firms pass costs through.

Cambridge Associates reviewed the expenses of the platforms it sampled for 2024. It puts the pay risk in one line: “Variable compensation is generally charged in addition to a fund level incentive fee, exposing investors to possible netting risk”. That is the risk of paying winning teams in a year the fund loses.

Why did London’s bill keep rising in 2023, the year investors pulled money out?

Below the paid line:

• London’s bill against the two main funds’ capital at four year ends, at two exchange rates.

• The year money left, split into bill and capital on two bases, and which fund it left from.

• What the regulator counts as London’s fixed overheads, from London’s own filing.

• The bet on London’s next accounts, its odds and the two dated checks.

Read more

On 27 August 2026, AQR’s Form ADV listed 191 Flex hedge funds; 187 listed one beneficial owner. They are the newest part of the tax business Bloomberg credits with making AQR the world’s largest hedge fund manager. That business sells two things: deferral of gains, and ordinary losses that can offset wages, within a limit.

The IRS notice, open for comment until 28 October, describes the second: swaps, currency forwards and straddles. Bloomberg ties those losses to AQR’s commingled funds, Delphi Plus first; AQR’s materials for the separate Flex accounts list none. Guidance by 31 March 2027 tests whether the notice stops at the commingled funds.

A holder’s exposure turns on which product his fund sells, and AQR’s on how much of its growth those commingled funds carried.

I read four of AQR’s Form ADV filings, the SEC registration that lists every private fund, from November 2024 to August 2026. I matched the Flex funds on the May 2026 filing to their Form Ds, the notices a fund files after its first sale. In order, they show:

• Taxes built AQR’s size: tax funds went from 10.6% to 43.5% of its private fund gross.

• Three wrappers make one tax machine, the newest a hedge fund of one.

• Clients buy deferral or ordinary losses; documents Bloomberg saw put Delphi Plus’s 2025 ordinary losses at 28% of capital.

• Washington is reading one half: the notice’s three trades need a derivative or a currency election.

• Below the wall, a split of AQR’s private fund growth, fund by fund, measures how much of it the notice describes.

Source: Author’s calculation from AQR Capital Management, LLC Form ADV Part 1A, Schedule D 7.B.1 (Q11, Q13), filings of 27 Nov 2024, 30 May 2025, 29 May 2026 and 27 Aug 2026.

Read down the last column to May 2026. Tax funds are the Flex funds plus the commingled AQR TA (tax aware) funds; gross is each fund’s gross assets on its Form ADV row, never client money.

Taxes built AQR’s size

Alternative Fund Insight’s power list of 26 March 2026 had AQR’s hedge fund assets up 89% in 2025 to $109.1bn, “ahead of long-time leader Bridgewater Associates”. On 4 August, Hedgeweek, citing a Bloomberg report, called AQR “the world’s largest hedge fund manager”. Bloomberg’s headline named the cause: “A Tax Strategy for the Rich Built the World’s Largest Hedge Fund”.

None of the three says what it counts, so the rank stays theirs. A Bloomberg Law headline on the notice added the sequel, “Tax-Slashing ‘Holy Grail’ Popularized by AQR Dealt IRS Warning”. Read together, they say the strategy that built the rank is the one the IRS warned about.

The test is the fund row reading: Schedule D of Form ADV gives each private fund a row, with gross assets at Question 11 and beneficial owners at Question 13. Gross counts the long side of a levered book in full, which is why AQR’s $312bn of regulatory assets sits well above the $187.18bn of client net assets in its brochure at the end of 2025. I sorted every row into Flex funds, TA funds and the rest, leaving out AQR Arbitrage, a sister adviser with its own filing.

The trap is the date. All four filings are amendments between annual filings, which the SEC’s instructions do not require to refresh asset figures, so each mixes old values with new series, August most of all; its tax share reads 48.2%. I measure on the May 2026 filing: 43.5%, gross against gross.

On money, Institutional Investor reported that by the end of 2025 “more than a third of its total assets” sat in tax aware funds. On private fund gross or on money, tax is a third or more, and it is the part that grew. The label is right that taxes built AQR’s size; it does not say which tax.

Three wrappers, one tax machine

Cliff Asness, AQR’s cofounder and principal owner, gave the reason in a 2021 essay titled “Now There’s Nothing Certain But Death”. “For almost my entire career I’ve been vexed that investments for taxable investors didn’t focus enough on after-tax returns, and many taxable investors didn’t seem to care,” he wrote. AQR’s brochure calls the answer “tax-aware implementation of some of our strategies”: its systematic strategies, sold through three wrappers.

The first is the Flex accounts: separately managed accounts (SMAs) that advisers and wealth managers sell at “typically $1 million”, per AQR Flex’s Form CRS, its client relationship summary. The Flex accounts get no fund rows.

Loukia Gyftopoulou, a Bloomberg reporter, told NPR on 1 October that, in the few years since it began offering the strategy, AQR went “from having 3 billion in these accounts to having 70 billion”. That is about the size of the whole tax aware business, which Institutional Investor put at “about $68.8 billion” in June, so her “these accounts” may mean all of it.

The second is the TA funds, ten commingled private funds named “AQR TA” on the August filing, which added Delphi Long Short Equity Fund II beside the original Delphi Long Short Equity. Delphi Plus is the largest by gross, and Delphi Long Short Equity has more owners.

The third is the Flex funds: series of AQR Flex 1 Series LLC, each listed as its own private fund and managed by AQR Capital Management II. None was on the November 2024 filing. These are hedge funds of one: Form ADV’s instructions make any private fund that “may sell securities or other assets short” a hedge fund.

Series G1 is one. Its Form D, filed on 7 May 2026, records $100m sold to one investor; the August filing shows $311,342,000 of gross and one beneficial owner.

No document I read says why AQR puts one client’s book in a fund of its own. An AQR paper on funds of one in general, not on its own Flex funds, says such a fund “may technically qualify as a partnership, but in substance, it often resembles an SMA”. It adds: “A legal wrapper cannot be used to circumvent anti-abuse rules.” On that reading the wrapper changes the label, since an SMA gets no row on Schedule D, and should not change how the anti-abuse rules apply.

One machine, then, with three doors, and the newest opens onto a hedge fund with one beneficial owner.

Clients buy deferral, or ordinary losses

Bloomberg’s August story put the Flex pitch: “Invest $100 million in the most aggressive of AQR’s Flex strategies”. Over ten years, “it may generate over $580 million of losses that can be used to erase taxes from other investments.” Institutional Investor reports the reading of AQR’s Flex marketing presentations by Nate Koppikar, a short seller at Orso Partners, that “Flex SMA projects cumulative net capital losses of 723 percent of invested capital over ten years”. His figure names the Flex accounts; Bloomberg’s names no wrapper.

AQR answers that the losses are not the point: “most of the tax benefit of TA LS strategies, relative to their tax-agnostic counterparts, comes from the deferral of gains,” it wrote on 28 September. Deferral means postponing the realisation of gains, and the losses buy it:

1. The account holds long and short positions, with leverage.

2. It sells positions that have fallen, realising capital losses that can be used against gains elsewhere.

3. It keeps those that have risen, so the kept winners become unrealised gains, taxed only when sold.

The two figures and AQR’s answer describe one book. Each loss realised cuts the book’s tax basis by as much, so the unrealised gain grows with every one. What the losses are worth depends on the exit. A seller pays tax that may “offset some of the benefits accumulated along the way”, per AQR’s Not Locked Up. Heirs get “a basis step-up at death”, per its lifecycle paper, but shorts are not stepped up, leaving “a small remaining built-in gain of 19% of the current NAV” in its 150/50 case.

The second product

The second product changes a loss’s character, capital or ordinary, which decides what it can offset. Two Bloomberg figures rest on documents its reporters saw. Justina Lee wrote on 22 November 2024 that “An AQR presentation obtained by Bloomberg News shows” Delphi Plus “was able to generate ordinary losses amounting to 31% of capital invested in 2023”. On 29 September 2026, Sridhar Natarajan and Loukia Gyftopoulou wrote that the fund “recorded ordinary losses in 2025” equal to 28% of capital invested, “according to documents seen by Bloomberg”.

The rest comes from people familiar with the funds. One told Lee that Delphi Plus’s trades include “notional principal contracts, or NPCs”, the class of contract that includes swaps. Her story added: “AQR has at least two more, the people said, including the trend-following TA Helix Fund” and the multistrategy TA Legacy Fund.

Mark Stancato of VIP Wealth Advisors wrote on 10 August that “In Delphi Plus, swap and currency activity can generate separately stated ordinary income or expense”, while AQR Flex “may generate capital losses”. AQR, he added, “explicitly takes the position that its tax-aware funds are trader funds”, funds that trade as a business, so Delphi Plus’s ordinary losses “may potentially offset W-2 income”, within limits that include the cap on business losses.

Take one holder at Delphi Plus’s $5m minimum (its Form ADV row and Form D): at 2025’s 28% that is $1.4m of ordinary losses. The 2025 cap lets a joint filer set $626,000 of business losses against wages; at the 37% top federal rate, that is about $232,000 of tax that year, and the rest carries forward.

Daniel Hemel, a New York University law professor who specializes in taxation, told Institutional Investor: “The IRS could stop it because it is using derivatives to generate ordinary losses.” The same story added: “Hemel isn’t so sure the IRS would shut down the Flex SMA strategy.” His line runs where the swaps are: in Delphi Plus.

A fund’s name does not tell a holder what he owns: Delphi Long Short Equity shares Delphi Plus’s TA wrapper, and no document I read states its tax character. Every fund tied to ordinary losses is a commingled TA fund that AQR, by Stancato’s account, treats as a trader fund.

No Flex fund’s offering document is public. AQR Flex describes “long/short equity strategies” with no swaps or derivatives, but it describes the Flex accounts. I class the funds of one with them because AQR’s paper says such a fund resembles an SMA, and no document I read puts a derivative in either.

Washington is reading one half

Notice 2026-62, released at the end of September and printed in the Internal Revenue Bulletin of 19 October, names no manager. It asks for comments by 28 October on tax aware fund strategies that “create a pattern of generating capital gain and ordinary loss”. Section 3 describes three trades, held in “an investment partnership or a separately managed account”, and each lets a loss arrive as ordinary while the matching gain stays capital:

1. An identified straddle pairs a currency forward with a currency future, or an equity index swap with a future on the same index, and closes the future first, so a gain lands as capital and the matching loss as ordinary.

2. Currency forwards are bought and sold the same day, and an election chooses each forward’s character after the fact.

3. A fund that is “a trader for federal income tax purposes” ends its winning swaps just before a scheduled payment, so the gain is capital, and holds its losing swaps to the payment, so the loss arrives as ordinary expense.

A book that holds only stocks, long and short, has no currency contract or swap to elect or close, so none of the three fits it. Section 3 calls its one stock example, an index investor who sells losers and keeps winners at year end, “long-standing, well-established”: a long only book, with nothing said either way about a levered long and short one.

Section 4.01(4) keeps the door open, asking about “other investment fund strategies” that “may be viewed as producing unintended federal income tax results”. Guidance “could apply prospectively only or retroactively”, and a retroactive rule would reach losses already taken.

The platforms moved first, on new money. Fidelity restricted new client assets in long and short SMAs from February 2026, by Koppikar’s account, and Schwab lifted its minimum for some such accounts from $1m to $10m on 16 September, Bloomberg News reported.

Institutional Investor, which obtained his letter to Orso’s investors, quoted Koppikar: “if regulatory action forces custodians to reconsider the risks of facilitating these structures, the entire AQR Flex SMA growth engine seizes up overnight.” His engine is the Flex accounts, so no Schedule D row can test him.

When a manager’s growth is a tax product, the question is what its trades sell, deferral or character, and whether they run in a commingled trader fund. That question reaches every tax aware long and short manager, every league table that counts tax accounts as hedge fund assets, and Affiliated Managers Group (AMG), which holds an equity stake in AQR. Michelle Celarier of Institutional Investor reported that “AMG’s CFO has said that the company expects AQR to account for more than 20 percent of its earnings this year.”

So far the evidence points away from the funds of one: nothing I read ties one to the notice’s trades, though the Flex funds went from none in November 2024 to 94 in May 2026.

How much of AQR’s private fund growth sits in the funds tied to ordinary losses, and how much in its funds of one?

Below the paid line:

• The table: the change in gross by fund and family, November 2024 to May 2026, graded by evidence, then Form D sales.

• Delphi Plus’s owner curve; the largest fund of one; the Flex series first sold in the third quarter of 2026.

• The verdict with its odds, the 31 March 2027 line that proves it wrong, and the dated checks.

Read more

Chris Rokos’s fund made 50.8% in 2022, its best year. In January 2024 Bloomberg’s headline read “Rokos’ Hedge Fund Paid Members £445 Million After 2022 Gains”. Yet that record year booked his London partnership 62% of the revenue his pandemic year did.

The headline is right that the firm’s revenue swings with the fund, but the return alone did not set it. A macro firm like this one is paid mostly by its fund’s climb above the high-water mark, the highest value already charged a fee. In London’s accounts the cut fell on his own holding company, not on the other members: the owner eats the mark.

Money in the hole, the gap below its mark, pays no performance fee. His July 2025 fee rise, the step-up, has two rungs, and the fixed one, a higher management fee, keeps paying through the hole: 75 cents more per $100 every year.

I read the ten sets of accounts the partnership has filed at Companies House since 2016 and checked each year’s figures through March 2024 against the next year’s comparative. They tell the story in five chapters:

• A Jersey manager he owns earns the fees; London bills it for a share.

• The pandemic year booked about £1bn; the record year first refilled 2021’s hole, which explains most of its fall in revenue.

• In London’s accounts the fall came out of his holding company’s allocation.

• The fixed fee pays the firm below the mark; the step-up adds about $150m a year.

• What the new terms would have taken since January 2020, and which fee takes it.

Source: Author’s calculation from Rokos Capital Management LLP accounts, years to March 2017–2025 (Companies House) and the fund’s reported returns · as of 21 October 2026

Each bar is a year’s revenue to 31 March, labelled with the return of the calendar year whose fee it holds. The firm’s assets grew from about $3.5bn in 2016 to about $22bn in 2025.

A Jersey manager pays London partners

The fees are earned by Rokos Capital Management (Jersey) LP, the Jersey manager. The London partnership, Rokos Capital Management LLP, bills only that manager; its accounts to March 2025 say “All revenue arose in Jersey, as sub-advisory fees”. It earns whatever share of the fees the Jersey manager passes down, a share the SEC brochure does not size.

Chris Rokos holds at least three-quarters of the Jersey manager, which in turn holds at least three-quarters of his holding company, Rokos Intermediate (Jersey) Ltd. That company takes an allocation of the partnership’s profit (Form ADV Part 1A, Schedules A and B).

Before the step-up, on terms the press reported, investors paid 2% a year of their money and 20% of the gain above the high-water mark. The fees fit a charge at 31 December, so the fund’s 2020 sits in the partnership’s accounts to March 2021.

In 2019 Chris Rokos, also the fund’s main trader, merged “portfolios previously run by individual traders into a single pool of money, allowing him to place bigger bets”. Such a book, like his bets against the Fed, wins big and loses big, and one bad year leaves the whole fund far below its mark.

Christos Nifadopoulos, a designated member, signed the accounts to March 2025 and their plainest sentence: “As a result of its revenue being linked to the performance of the fund it manages, the LLP’s principal risk is market risk.” The record narrows that link to the fund’s distance above its mark: for 2024, a year begun at the mark, revenue was £1.24bn.

The record year refilled a hole

In 2020, the year to beat, the fund made 43.8% and went into 2021 at about $14.5bn. For money that began the year at its mark, the whole gain carried the 20% fee, so fee and return rose together. The accounts to March 2021 show it: revenue was £1,038.3m, against £269.7m for 2019’s 9.3% gain. His holding company was allocated more than half the profit.

December 2020 reset the mark at the fund’s new high, and money invested in January 2020 then spent most of two years below it.

I matched the accounts to the fund’s year using the quarterly valuations UBS files on the SEC’s Form N-PORT. UBS’s A&Q Multi-Strategy Fund holds Rokos, and its four quarters of 2022, with no money in or out, chain to +50.8%, within a fraction of a point of the return Reuters reported. The fund publishes no returns; every other year’s figure is the press’s.

In 2021 the fund lost 26%, its worst year; in 2022 it made 50.8%. Run $100 invested on 1 January 2020, on 2% and 20%, through both years:

1. In 2020 it gains about 57% before fees and ends at $143.80, its new mark, after $12.95 of fees.

2. In 2021 it ends at $106.41, after $2.88 of management fee and no performance fee, because it is below the mark.

3. In 2022 it makes the same gain before fees, about 57%, and ends at $160.49. The 20% falls only on the climb above $143.80, so its fees are $6.30. UBS’s quarterly valuations show it crossing the line in the third quarter, at $145.73 by 30 September.

The same gain before fees paid less than half the fee. That $100 is among the most mark-bound money in the fund, though some money was not: the $1bn taken in January 2022 entered at its own mark, so it paid the full fee on 2022.

Set each year’s revenue against the calendar year whose fee it holds, and the record year booked £643.5m, 62.0% of 2020’s. The pitfall is the year: matched to the accounts to March 2022, 2022 seems to have booked £119.7m, the lean year’s figure.

Three ordinary explanations for the 62% fail on the record. A smaller fund would have shrunk the revenue, but it went into 2020 as a “$9 Billion Hedge Fund” and the firm went into 2022 at $12bn. The pound did not flatter 2020: in dollars, at the European Central Bank’s year-end rates, the record year is 54.6% of 2020’s, a deeper fall. And the US arm, Rokos Capital Management (US) LP, is paid out of revenue, so it can lower the profit, never the revenue.

That leaves the mark, and on every estimate we could build from the fund’s reported size it explains most of the fall. The rest is a change in how much of the Jersey manager’s fees reached London, which the accounts do not show and the press figures cannot size. At the year-end rate London booked about $1.42bn for 2020. The $100 case’s rates give only $1.17bn on the $9bn the fund started that year with, so the reported sizes cannot split the fall more finely than that.

The mark fell on the owner

Exhibit 2 · The record year’s fall landed on one member · as of 21 October 2026

Source: Rokos Capital Management LLP accounts to March 2021 and March 2023, notes 7 and 14 (Companies House); 2020 return as Bloomberg reported it, 2022 from UBS’s A&Q fund’s N-PORT filings; all other members include Chris Rokos in his own name and two corporate members, Erunger Limited (Jersey, a member since 3 January 2019) and Rokos Services (UK) Ltd, which bills the partnership and is at least three-quarters owned by his holding company (members list; Form ADV Part 1A) · as of 21 October 2026

The last money rows show who absorbed the fall: his holding company’s allocation fell 88%, while all other members’ profit fell 6%. The £26.7m the press reported as that year’s top payout is note 7’s profit paid to the member with the largest entitlement; the allocations are note 14’s. Of the £62.3m allocated to his holding company, £32.4m was still owed to it at 31 March 2023, and still at March 2025.

On that record the partners appear to have been paid on the year, and the owner’s holding company took the hole: the owner eats the mark. The mark sets the size of the pool, and profits “are allocated to members after finalisation of the financial statements”, by a partnership Chris Rokos controls.

What London did not receive did not leave him: the Jersey manager that keeps the rest is at least three-quarters his, and nothing public shows what it kept.

After 2017’s 3.4% loss, the accounts to March 2019, which hold the fee for 2018, allocated his holding company £15.0m, against £112.8m two years earlier. The other members’ profit fell from £40.3m to £21.3m. Measured from the year before each loss to the year after it, his holding company took the deeper cut both times; only in 2022 did the rest barely move.

Nor is the split a formula: in the year to March 2024, a year above the mark, his holding company was allocated nothing while the member with the largest entitlement was paid £110.2m. Chris Rokos is also a member in his own name, so that nil says nothing about his own take, which the accounts never attribute to him by name.

The fixed fee pays lean years

The lean year is the accounts to March 2022, which hold the fee for 2021, when the fund lost 26% and earned no performance fee. Revenue was £119.7m against costs of £106.8m.

That year shows how much of the fixed fee reached London. The fund went into 2021 at about $14.5bn and the firm into 2022 at about $12bn. Across the year that is about $13–14.5bn. A 2% fee on it comes to roughly $260–290m by our estimate. If the insiders’ money paid none, it is $221–247m. London’s £119.7m, about $161m, was between about half and three-quarters of it, roughly enough to cover its own costs.

In July 2025 the firm told investors it would raise the management fee to 2.75% and the performance fee to 25% over three years. Hedgeweek, citing Bloomberg, put the move down to heavy investment in talent, research and trading infrastructure. Investors unwilling to accept could redeem; a firm representative said no redemptions had occurred.

The accounts bear out the talent part: costs nearly tripled, from £106.8m in the lean year to £311m in the year to March 2025. The London partnership reported 310 staff to the SEC in October 2026 and the US arm 51, their salaries paid whatever the fund does. The higher fixed fee looks built to pay them through another 2021.

In August 2025, with the fund above $22bn, the firm moved to cap it at $20bn and return the excess. Investors who stayed were paid: by November 2025 the fund was reported up more than 20%, against 4.8% to October for the self-reported macro average of HFR, a data firm, and 0.9% for Brevan Howard’s Master Fund.

The October 2026 brochure names three fees: management, infrastructure and performance. At the full rung, 0.75 points more on a fund held at its $20bn cap is $150m a year. On the $22bn the firm was reported to manage in October 2026, it is $165m. If the 15% that Rokos and related persons own (Form ADV Part 1A) pays no fee, the cap’s figure is $127.5m, more than half of the lean year’s management fee on the same fee-paying share.

A high-water-mark fund that pays its people from performance fees usually has its thinnest fee year when it loses money, and a fixed charge, as a fee or a pass-through, is what pays the firm through it. Tudor’s brochure says its pass-through staff pay “will be payable whether or not the applicable Tudor Hedge Fund experiences positive trading results”, and Marshall Wace has charged a “compensation surcharge” of up to 0.75% of fund assets.

Peers’ brochures put their management fees lower, each beside other charges:

• Caxton: up to 2.4%, with pass-throughs and performance rates of up to 30%.

• Tudor’s flagship: 1.75–2.25%, with its pass-through on some funds.

• Element: 2%, with performance rates of up to 40%.

So 2.75% would be the highest management fee of the four, though not the highest total charge.

In August 2026 Rokos was reported to be adding a three-year share class, with 8.33% of capital redeemable each quarter against 25% in the one-year class. Our August piece read the fee rise and the cap as price and size instead of a longer lock-up, and we were wrong about the lock-up.

Should an investor stay in Rokos for three more years at 2.75% and 25%, or redeem now?

Below the paid line:

• The new terms run over the fund’s own path since 2020, in one table.

• How the extra cost splits between the two rungs, and which one charges in a losing year.

• Whether staying paid: the share of the gain kept, and the one kind of year that changes it.

• Our bet on the December accounts’ revenue line, with its odds and its kill line, then four dated checks.

Read more

In July 2026, Steve Cohen’s Point72 flagship lost 3.3% while Turion, his firm’s AI fund, lost 11.4%. The flagship, like Millennium’s and Balyasny’s, spreads its capital across many traders’ teams, called pods.

The book shared by many traders lost far less than the book run on one theme, so the question is how, and who paid. My answer is the drawdown ladder: the staged cuts a pod shop makes to a losing trader’s capital. It can keep the firm’s loss small by moving it onto the traders it cuts and, regulators warn, onto anyone holding the names they sell. Millennium’s, Point72’s and Balyasny’s October returns, printed by 10 November, test it.

The same trade, two outcomes

Business Insider’s July scorecard lists 13 platforms besides Citadel, and their median July loss was 1.5%. The four AI funds in Hedgeweek’s report on July’s biggest losers lost a median 16.6%. That is about eleven times as much.

I read the three firms’ Form ADV filings (the registration a US investment adviser files, brochures included) and Cambridge Associates’ 2014 toolkit for allocators, which prints one unnamed manager’s ladder. I also set the two newsrooms’ July returns side by side: where both name a platform (Point72, Millennium, Balyasny, Verition, ExodusPoint and Citadel), the figures agree. Point72’s brochure ties Turion to businesses “believed to be impacted by artificial intelligence.”

Each figure is a return reported in the press. A platform that held less AI, or ran low net exposure with its longs nearly offset by shorts, would show part of the same gap before any trader was cut. The AI funds were picked as the month’s biggest losers, so eleven times is an upper bound.

The firms’ own 13F filings for 30 June measure the first of those (Millennium, Point72, Balyasny). Their AI-chip baskets were about 3% to 4% of their long books. Held through July, they cost under 1% of capital, about a fifth to a quarter of each firm’s July loss. Less AI explains much of the gap to the AI funds. It does not explain what the platforms lost. No July 2026 pod closure for losses has been reported.

Read it from the top: every AI fund listed lost more than every platform, and the two platforms that lost more than 5% both trade Asia.

Those two are the leak. Dymon Asia and Pinpoint fell amid “stock market jitters in Korea and Japanese economic woes,” by Business Insider’s account. A platform whose books share one region can lose like a concentrated fund, and a ladder that cuts one pod at a time does least for a firm whose pods lose together.

Citadel is set apart because it stood on the other side.1 Wellington, its flagship fund, gained 5.9% in July. That month Situational Awareness, an AI fund, reportedly lost 67% and sold most of its public equity book to Citadel to meet margin calls. Those calls worked as a stop with one step, set by its lenders, which takes away two things a ladder spreads out: the size of the cut and its timing.

The firm halves a losing book

Diversification is the usual explanation for the platforms’ steadiness. The USCA All Terrain Fund, an allocator to them, wrote in its annual report filed in June 2025: “We view these allocations as intended to be ‘market neutral’.” The managers’ own filings are less sure. Point72’s brochure: “even a well-diversified, multi-strategy approach may not protect a Point72 Fund from significant losses.” Millennium’s adds that “strategies that are largely uncorrelated under normal market conditions may become more correlated at times of market stress.”

If diversification can fail under stress, something else holds the number, and the firm decides it. Millennium’s August 2026 brochure describes its job as “selecting, monitoring and evaluating Portfolio Managers and allocating and reallocating the Millennium Partners Funds’ invested capital among them.” Balyasny’s March 2026 brochure says the firm “regularly reassesses the allocation of the Investment Funds’ assets for possible reallocation among other Portfolio Managers.”

Millennium’s brochure states no thresholds; the numbers come from reporting. A portfolio manager running $1bn who loses 5% has his trading capital “slashed in half, to $500 million.” Once losses reach 7.5% of the original, “they will likely be fired,” with exceptions. Bloomberg’s reporting on the industry, as Hedgeweek carried it, says pods are typically dismissed after a 7% decline, so the second rung sits at 7% to 7.5%.

On that $1bn book, a loss of $70m to $75m makes it closable.

Cambridge Associates’ 2014 toolkit, written for allocators, prints one unnamed platform’s ladder. A 2.5% loss, half Millennium’s reported first rung, halves capital, a cumulative 5% halves it again, and a cumulative 7.5% brings a stop out, “an immediate sale of the assets in the portfolio to prevent further losses.” The same paragraph, on multi-manager (”MM”) firms, carries its own caveat: “most MM firms maintain soft drawdown limits or often grant exceptions to hard limits.”

Here is the reported ladder, one step at a time:

1. A pod’s book loses 5% of its allocation.

2. The firm halves the allocation, so the pod sells longs and covers shorts, which locks in the loss and halves the next one.

3. At 7% to 7.5% the firm can close the book, and the stop out sells what is left.

4. The firm’s number takes that pod’s realised loss, capped by the rungs.

August 2024: losses, then exits

The unwind of the yen carry trade, in which investors borrow cheaply in yen to buy assets that pay more, gives a case with names in it. Early losses in August 2024 prompted Millennium, Balyasny and BlueCrest, another firm that runs its traders in pods, “to halt the operation of at least six traders and their investment pods,” Bloomberg reported, as Hedgeweek carried it on 2 September.

1. Early August: books lose money as the yen carry trade unwinds.

2. The report ties two exits to those losses. Ryan Fitzgibbon, who traded industrial and energy stocks for Millennium in Houston, “left the firm following losses.” BlueCrest shut Chiga Murayama’s Japanese government bond pod after losses, and he and team member Yosuke Motegi left.

3. Others leave, with no loss tied to them by name. Shao Ying and Zachary Corones, index rebalancing in Asia for Millennium, “also exited,” and Mark Cox left Balyasny in Hong Kong. The report puts the exits down to the firms’ “stringent risk management approach.”

4. The firm’s number: Millennium was up 0.7% through 23 August.

The loss landed on named traders, their books left, and the firm stood in profit with a week of the month left. That is the order the ladder predicts, though it shows the order, not the effect.

The cuts took out books that were losing, and a rebound in the market did the rest; nothing public says how the 0.7% splits between the two.

Two books carry the firm’s risk

The rule bends at the top, and the record shows where the firm’s own risk then sits. Glen Scheinberg and Pratik Madhvani run index rebalancing pods at Millennium, trading around changes to stock indices. By early March 2025 their two books had lost about $900m, the losses behind Millennium’s 1.3% February, its worst month in more than six years.

Millennium ran about $75bn across more than 340 teams at the time. The two books’ $900m was about 1.2% of that capital, as large as the firm’s whole February loss on its own. The comparison is loose: the $900m runs to early March and counts the two books gross, before anything the other teams made.

Both stayed. The reports I read name no cut to the index rebalancing teams after February 2025, and Millennium kept running the trade. No report gives the pods’ capital, so whether the $900m crossed their rung cannot be known.

In November 2025 the same teams were reportedly down hundreds of millions of dollars at one point, “although some losses were recovered toward month-end,” and Millennium finished the month up about 0.5%.

In June 2026 the same two pods made about $3.7bn, more than half of Millennium’s roughly $6.6bn of profit before fees, as Bloomberg reported. Millennium returned 4.1% that month.

So two books carried the firm’s worst month in more than six years and more than half of its June 2026 profit. Keeping them reads as a choice the firm made, and its reported rule allows one: “sometimes exceptions are made.” Cambridge’s file describes the same bend in plainer words: platforms widen limits “for an unusually profitable or long-tenured trader,” and its one printed ladder stretches for traders on an unusual “winning streak.”

The ladder is hard for most books and soft for the books that earn most, so the firm’s own exposure gathers in its biggest books. That also settles one rival reading, that a bad month’s losses scatter across hundreds of teams and cancel: in February 2025 they sat largely in two.

The market pays, regulators warn

When a crowded long breaks, the platforms cut their losing books in the same days, so anyone still holding those names meets the sales as the price. A pod shop does not avoid the loss; it can hand it to whoever buys what its traders are forced to sell.

Two of the firms’ brochures warn about crowding:

• Millennium’s, in a risk factor on managers who trade by model, warns of what happens “to the extent that such Portfolio Managers’ models come to resemble those employed by other managers.” A disruption then “could accelerate reductions in liquidity or rapid repricing due to simultaneous trading across a number of managers in the marketplace.”

• Point72’s warns that growth in competing firms may bring more “investors that are attempting to purchase or sell similar positions simultaneously.”

Both describe many firms trading the same positions at the same time. Neither names its own ladder as a cause.

Andrew Bailey, governor of the Bank of England, named the pods’ part in a February 2025 speech: “where risk management results in pods de-risking aggressively in a shock, this could result in these funds amplifying market moves.” The IMF’s April 2025 report cites that speech, and its October 2026 report widens the warning to hedge funds in general.

Goldman Sachs’s prime brokerage counts the selling among the funds it finances. Its notes on October’s AI sell-off, as Reuters reported, track de-grossing, “long selling and short covering combined,” which is what a cut book does.

From COVID through the end of 2025, the three broad strategies Goldman tracks never all fell more than 80bp on the same day. In 2026 they did so three times, on 4 February, 28 July and 15 October. Funds with no ladder sold AI stocks too, so the count shows how hard the losses came, not the ladder’s share of them.

Leverage sets how much a cut book must sell. Multi-strategy funds’ gross assets averaged 9.51 times their net assets on 30 September 2023 and 12.29 times on 30 June 2026, each fund weighted by its size, in Office of Financial Research data from the larger funds’ Form PF filings, rates and repo books included. The average fund carries more assets per dollar of capital than in 2023; the data do not say how much of the rise sits in the books a ladder cuts.

Bruno Schneller of Erlen Capital, which invests in hedge funds, read October as “less a fundamental rejection of AI and more a classic, high-velocity unwind of a crowded trade meeting a macro reality check.” He pointed to “how much of the hedge fund industry has effectively been trading the same underlying theme, even when portfolios look very different on paper.” Exhibit 1 shows July’s version: twelve of thirteen platforms lost in the same month, which fits a shared trade without proving one.

The IMF’s October report puts a size on crowding by all hedge funds. In quarters of market stress, the stocks most crowded relative to their daily trading volume ran about 10 percentage points more volatile and fell about 4 points further than the least crowded. Nothing I read separates the ladders’ share of that cost, so the market’s part of the bill stays the regulators’ warning.

The trader carries the cut

A Millennium pod is paid on its own performance. Millennium’s brochure says what a losing year costs its manager: “If a Portfolio Manager suffers net losses during the year, generally the losses are carried forward and past losses must be made up before performance-based compensation becomes payable in subsequent years.”

A manager down on the year generally earns no performance pay until he wins the loss back. That gives a trader with a losing year reason to move to a firm where the count starts again.

Exits alone prove little. Business Insider put Millennium’s turnover at about 15%-20% of all staff each year in 2024 and tied it to the stop-loss rule itself; no report gives the rate for portfolio managers.

Stress months show the cut landing. In March 2025, Balyasny was “forced to stop out several portfolio managers.” The same report had Millennium down about 1.4% through the first week of March. It was liquidating a $1bn financials book run by Jonathan Philpot and an energy pod run by Justin Grant, and the reports give no reason for either closure.

Neither belonged to the index desks that lost the $900m. So the firm kept its two losing index books and closed two others in the same weeks.

Antoine Iskandar, a senior Millennium portfolio manager in Zug, shows the other exit. He managed “more than $600m” in equities, relative value and equity derivatives. His team “reportedly incurred losses running into tens of millions of dollars in 2026” after cumulative profits over the three prior years, Hedgeweek reported, citing Bloomberg. Balyasny is “set to hire” him. Iskandar, Millennium and Balyasny declined to comment.

He had also discussed a spinout with Millennium, a second reason to move. Bloomberg, reporting the move, framed what such a switch offers: it “benefits traders by allowing them to start making money for themselves again, instead of focusing on recouping losses at their previous employer.” The record shows a manager moving after losses; it shows no stop out.

October’s returns test the ladder

This is wrong if Millennium’s, Point72’s or Balyasny’s flagship fund reports an October 2026 loss larger than 5% in the monthly figures the trade press prints by 10 November 2026. That is more than Millennium’s reported first rung lets a single pod lose before its capital is halved; Point72’s and Balyasny’s rungs are not reported. The line tests whether the ladder bounds a firm’s month at all; it cannot show that the ladder caused July’s gap.

The mechanism has its own check. Watch for reports of pods closed or traders cut at the three firms in October, tied to losses. Bloomberg’s report of November 2021 is the model: Balyasny, BlueCrest and ExodusPoint each “curtailed the betting of two to four traders after they hit maximum loss levels.”

The line can lose, and it has. Point72 slid 10% in January 2021, the month it and Citadel put close to $3bn into Melvin Capital. It lost about 5% in November 2018, when Millennium’s 2.8% loss was its third worst month on record. Balyasny’s worst flagship month I found is a 4.3% loss in March 2026.

I would bet, at 90%, that none of the three crosses the line in October. The record, in unaudited press reports, holds one flagship crossing and one touch in the months I found, both at Point72, and the reports give no count of all months. I keep 10% on a breach because the first half of October brought this year’s third day of broad same day losses, and Asia stock pickers lost 6.8% in that fortnight.

A breach could come three ways the pods’ ladder does not reach. The firm can keep a losing desk, as Millennium kept its two index rebalancing desks in 2025. A gap beats any stop, because a stop out sells after the move. And the firm’s own direct trading outside the pods, Millennium’s brochure says, “may exacerbate any losses” when it adds exposure.

If all three report October inside 5%, the numbers held; reported cuts tied to losses would show the ladder operating, not that it was the reason. If one reports more, the ladder did not hold that firm’s month, whether the loss came through the pods or around them.

Further reading

• The Bank of England warned about this crowding. Citadel and Millennium’s size tier took $6.5 billion anyway: the same Bailey warning on pods de-risking together, set against where the money went

• When Hedge Funds Lost Money While Markets Hit All-Time Highs: The October 2025 Crowding Crisis: an earlier crowded unwind, and who sold into it

Next Thursday: a named fund’s bet, read from its own filing, with the position.

→ The three platforms’ June chip books marked through July, with the arithmetic and the 13F screen a reader can rerun on Patreon, open to everyone.

Navnoor Bawa · YouTube · LinkedIn · Patreon · Corrections: reply or comment.

Image: Millennium Management LLC · Trademark, the firm’s own mark, editorial use · via mlp.com

Two Sigma’s Absolute Return Enhanced Fund gained 15% in 2025 and is up 12.4% this year. In June, New Mexico’s Public Employees Retirement Association pulled roughly $100 million out of it anyway.

PERA’s own explanation, as reported by Hedgeweek, was that organizational issues at the firm had created “too much uncertainty, with no clear timetable for resolving the internal conflict.” The pension said this. It said so even as it acknowledged the strategy had “outperformed both the pension’s benchmark and comparable funds.” That’s a $100 million redemption from a fund that was working, on grounds that had nothing to do with the fund working.

I don’t think that’s the interesting part. Institutional investors pulling money over governance risk instead of performance risk is a known move, documented for decades in fund formation practice. What’s interesting is that the governance risk here was never obscure. It was on Bloomberg. The gap isn’t information. It’s decision speed.

Here is the short version of how I got there. I expected to find a hidden disclosure, a fact PERA should have caught and did not. It wasn’t hidden at all. The method was simple: pull the actual filing, pull the actual press dates, and put them on one timeline. The outcome flipped the story on its head.

The consensus: fast public news gets a fast institutional reaction

Ask an allocator what happens when a manager’s leadership structure blows up in the trade press, not in a quiet filing nobody reads but in an actual Bloomberg headline, and the working assumption is that a professional monitoring program reacts inside days, not months. That’s the whole pitch of an active manager monitoring program: pay a team or a consultant to watch the wire, and when something material breaks, the institution moves faster than a retail investor reading the same story a week later.

I think that’s a reasonable baseline, and it makes New Mexico’s timeline the thing that needs explaining, not excusing. PERA is not a small, understaffed plan. It runs an active monitoring program, by its own account. The news wasn’t buried. It named the two men, the disputed title, and the arbitration in the first 48 hours. Nothing about it was quiet.

The variant view: the delay sat between the headline and the wire transfer

Two Sigma Investments, LP filed its 2025 Annual Amendment to Form ADV on March 31, 2026, signed by James G. Hein, Jr. Buried in Schedule D’s free text Miscellaneous section, in the firm’s own words, is this:

“As of March 16, 2026, Dr. Siegel designated Seth Platt as his Executive Manager and as co-CEO. There is disagreement about whether, when designated, an Executive Manager becomes a co-CEO or whether the appointment of a co-CEO requires approval by both members of the Management Committee... Mr. Platt has moved to terminate Mr. Lyons given his view that Mr. Lyons undermined his authority as Executive Manager. Mr. Overdeck believes Mr. Platt’s actions in this regard are imprudent and baseless and has placed the termination into dispute resolution, which means that the termination cannot take effect without Management Committee agreement or resolution through arbitration.”

That’s a signed, dated, federally filed statement that the governance structure built around Two Sigma’s two founders had broken down to the point where one side was trying to fire the other side’s designated co-CEO. It reached the trade press almost immediately. One day, not five months. Bloomberg’s piece on Hoffman’s resignation ran April 1, and Hedgeweek’s followed April 2, both reporting the Platt/co-CEO ambiguity and the move against Carter Lyons, citing the same March 31 filing this article quotes (Bloomberg; Hedgeweek).

Two Sigma’s disclosure to press pipeline, on this filing, worked about as fast as institutional disclosure ever works. The interesting number isn’t how long the market took to notice. It’s how long PERA took to act once it had.

Separately, and later, a second and different set of facts became public: the Siegel family’s arbitration referral over a former employee’s severance claim, and John Overdeck’s own account, given in his divorce trial, that the firm had lost “a major investor” once before. That investor withdrew in 2023, according to a person familiar with the matter cited by Hedgeweek (Hedgeweek). Those specifics didn’t surface until Bloomberg and Hedgeweek reported them around August 17-27 (Hedgeweek; Bloomberg). That part genuinely lagged. The April news, the one that explains PERA’s stated rationale, did not.

Where the two founders’ structure actually came from

This did not start as a fight between two people with no formal roles. In August 2024, Overdeck and Siegel both stepped back from the Co-CEO title they had held since founding the firm and installed Carter Lyons and Scott Hoffman as Co-CEOs, effective September 30, 2024 (Two Sigma). One structure, two men sharing one title. That arrangement was the firm’s own governance fix for exactly the kind of stalemate risk a founder controlled shop always carries, and it held for about eighteen months.

It broke in two directions at once this year. Overdeck returned to his own seat on the management committee, which is what Hoffman later cited when he resigned, describing “ongoing governance challenges” that followed directly from that return (Hedgeweek). Siegel then named Seth Platt. Platt would replace Hoffman. That triggered the exact dispute Two Sigma disclosed in its March ADV filing: whether naming a replacement Executive Manager automatically confers the Co-CEO title, or requires sign off from both sides of a committee that, by this point, could not agree on much. Platt then moved to fire Lyons. He moved fast. Overdeck blocked it. He pushed the whole question into arbitration. The two founder veto structure had failed. At the one thing it existed to prevent.

Read that sequence next to the ADV language above and the disclosure was not vague. It named both principals, dated the disagreement, and stated plainly that a live termination fight could not resolve without either committee agreement or arbitration. Bloomberg had the same facts within a day. Same day, same story.

Peer multi strategy managers price this exact structural risk in how they lock up capital. D.E. Shaw, Millennium and Citadel lock up cash for years; Rokos chose the opposite. A founder controlled shop with a fragile succession fix is precisely the kind of manager a longer lock up is meant to protect against a fast exit like PERA’s.

Lay the dates out in order and the sequence reads clean. September 2024: Lyons and Hoffman become Co-CEOs. Early 2026: Overdeck reclaims his committee seat. March 16: Siegel names Platt. March 31: the ADV filing discloses the fight. April 1 and 2: Bloomberg and Hedgeweek both report it. Then a long stretch with no new public fact. Sometime in June: PERA redeems. The story moved fast. The money moved slow.

The mechanism: public disclosure has one clock, institutional redemption has another

A governance blowup moving through an allocator’s process runs on two separate clocks, and conflating them is what made my first read of this story wrong.

Clock one: how fast the information becomes actionable. Here it was fast. The ADV filing posted March 31. Bloomberg and Hedgeweek both had the story by April 2. They cited the filing directly. Two Sigma did not bury this in language nobody parses; a fund’s own free text disclosure requirement, plus a wire service reading EDGAR the way wire services do, moved this from private dispute to public headline in under 48 hours.

Clock two: how fast an allocator can actually redeem, even once it decides to. This is the clock that matters here, and hedge fund redemption terms are not instant by design. Industry-standard terms permit redemptions on a quarterly basis, typically on 30 to 90 days’ prior notice to the manager, with proceeds paid out within 30 days after that (Proskauer). Say Two Sigma’s Absolute Return Enhanced Fund runs anywhere near that standard. An LP that decided to redeem the day the news broke, April 2, could easily not see the money move until May or June under the fund’s own mechanical terms. That holds independent of how fast or slow PERA itself was to decide.

I cannot confirm Two Sigma’s specific notice period. Not for this fund. That is a real gap, and it is the one place this piece’s mechanism claim is a plausible industry standard inference rather than a verified fact. What can be said is that the gap between the April news and the June redemption, somewhere around nine to thirteen weeks depending on the exact June date, is at least consistent with a quarterly redemption structure carrying a 60-to-90-day notice window, layered on top of whatever time PERA’s own investment committee needed to review the news, decide, and file the notice in the first place. Both clocks run inside that gap. Neither one alone explains it.

A tighter version of this same mechanism shows up wherever a fund has formalized its own version of the second clock. Blue Owl’s redemption gate costs the fund itself $12 million a year to run, precisely because the gate is the second clock, priced and disclosed rather than left to an allocator’s own committee calendar.

That’s the finding, reframed from where I started: the redemption right was never hard to find, and the news was never hard to find either. What actually took time was moving through the machinery, on both sides, that turns a headline into a wire transfer.

I will name the version of this I cannot independently verify, because I think it matters more than it first looks. At least one compliance vendor, Dasseti, markets an AI tool that claims to read Form ADV’s narrative text directly and flag conflicts and risk language, not just the numeric fields. Whether PERA’s own monitoring stack uses anything like it is not knowable from here. Neither is whether it flagged this specific paragraph. It does not change the finding either way. Even a tool that read Schedule D the moment it posted on March 31 would have surfaced the same facts Bloomberg published on April 1. At most, it would have given PERA a one day head start over the wire services. It would not have produced the weeks of lead time the redemption gap implies. The bottleneck sits downstream of detection, wherever detection happens.

Two clocks explain the shape of the gap. They don’t tell you what your own number would be. I built a five input audit: trigger to filed lag, filed to press lag, your fund’s own notice period, your own committee’s cadence, and the compounded sum. It’s worked through Two Sigma’s real filing as the template, in a $5 institutional note on Patreon. It’s the number almost no allocator has written down before they need it.

A firm whose internal awareness has outpaced its disclosures before

There is a second, older instance of this pattern at Two Sigma, on a completely different matter. It is worth naming because it is a more extreme version of the same shape: something true inside the firm for years before it became public.

In January 2025 the firm settled SEC charges for failing to fix known vulnerabilities in its investment models across roughly four years, from 2019 to 2023. It separately settled charges for violating the whistleblower protection rule, by requiring departing staff to falsely attest they had never filed a complaint with a government agency. Two Sigma Investments LP and Two Sigma Advisers LP paid $90 million in penalties combined and had already voluntarily repaid $165 million to affected clients during the investigation (SEC press release 2025-15).

In September 2025 the SEC separately charged a former Two Sigma researcher, Jian Wu, with deliberately manipulating those same models between November 2021 and August 2023. The alleged goal was simple. Replicate other models’ forecasts without authorization. The SEC’s own release ties the scheme to “at least $165 million in harm to certain clients” (SEC litigation release LR-26398). Here is how I am reading these two matters together. Wu’s alleged manipulation window sits entirely inside the settlement’s broader four year vulnerability window. Both releases cite the identical $165 million figure. Same number, twice. My read is these are very likely one underlying root cause, described across two separate enforcement actions filed eight months apart, rather than two independent examples of the same failure mode. Treated that way, it is still a real data point. The facts behind a $90 million penalty were known internally as early as 2019 and were not fully public until 2025. That is a several year gap. It dwarfs the co-CEO dispute’s one day one.

What $232.8 billion actually means

Two Sigma’s headline regulatory assets under management figure, $232.8 billion as of January 31, 2026, is gross. It includes leverage. It isn’t the same thing as net investor capital. The firm’s own ADV instructions require that distinction, and press coverage routinely drops it: both Bloomberg and Hedgeweek cited Two Sigma as an “$80 billion” or “$70 billion” fund in their own coverage of this same dispute. My guess is those smaller figures track a narrower measure, most likely net assets in a specific fund family rather than the full regulatory total, though I can’t confirm the exact reconciliation from public data alone.

I flag this because it matters for reading the PERA number correctly. $100 million divided by $232.8 billion is 0.00043. I make that four hundredths of one percent of the firm’s reported book. This was never a redemption that threatened Two Sigma’s business. Not even close. I read it as a signal. It was sized to be visible to other allocators watching the same dispute, small enough that Two Sigma’s balance sheet barely registers it.

The discriminator: is nine to thirteen weeks actually slow?

Here is the honest counterargument, the one a fund operations person would raise first, and I’m not going to dress it up. Nine to thirteen weeks for an institutional LP to review a governance crisis, get investment committee sign off, and route a redemption notice through a fund’s own 60-to-90-day mechanics is not slow at all. It might be close to the fastest this kind of decision can move through a public pension’s process. Maybe this is just how slow institutions are. Under that reading, there is no real gap to explain. No gap at all. PERA may have acted as fast as its own machinery allows. The story could be unremarkable.

I take that seriously, and I cannot fully rule it out, because PERA has never stated on the record what date it filed its redemption notice, what its investment committee discussed, or when. What keeps me from fully accepting the fastest possible speed reading is the fund’s own quoted rationale: “too much uncertainty, with no clear timetable for resolving the internal conflict.” That reads as language describing what is still unresolved, not language describing a decision already made and simply awaiting paperwork. Picture PERA deciding by early April and spending the rest of the gap purely on notice mechanics. I’d expect a different sentence from them. Something closer to “the dispute remained unresolved when our notice period expired” than “no clear timetable.” That’s a real distinction. It’s PERA’s own choice of words, not mine.

A public pension the size of New Mexico’s typically runs its investment decisions through a standing investment committee. It meets on a fixed monthly or quarterly calendar. Not on demand the day a story breaks. Even a fast institutional reaction to the April news would likely need to clear at least one scheduled committee meeting. Only then could a formal redemption instruction go out. I’d guess that alone accounts for several weeks of the gap. I say guess deliberately. PERA’s specific committee calendar for this period is not something that could be verified from public sources, and naming the assumption seemed better than dressing it up as a fact.

The narrative disclosure itself is a separate, cheap check any allocator can run before a gap like this one ever opens. I’ve written up the ninety second ODD test that FINRA’s newer cyber reporting channel makes worth running on any manager, and it applies just as well to a governance narrative buried in Schedule D.

Three things I can’t rule out

Three real gaps remain. I don’t know PERA’s exact redemption date within June, or its exact investment committee timeline. Without that, “nine to thirteen weeks” is a range built from one confirmed endpoint, the April news, and one imprecise endpoint, the month of June. It is a range, not a single confirmed figure.

I don’t know Two Sigma’s specific redemption terms for the Absolute Return Enhanced Fund. The 30-to-90-day, quarterly redemption framing is an industry standard inference from Proskauer’s general market description, not a fact about this specific fund’s governing documents, which aren’t public.

One redemption isn’t a base rate. This piece shows one institutional LP’s reaction time to one piece of unambiguous, fast reported news. It doesn’t establish how quickly allocators generally move once a story like this breaks, or whether PERA was typical or unusually deliberate.

What would prove this wrong

Know your own redemption clock before you need it

Two Sigma’s Absolute Return Enhanced Fund is still up double digits this year. The $232.8 billion the firm reports managing hasn’t visibly moved because of any of this. What changed is that a $100 million allocator decided a fund’s returns were no longer the only variable worth pricing. It made that call on information that had been sitting in the trade press, cited to the firm’s own SEC filing, for weeks before anyone pulled a wire.

If you’re allocated to a multistrategy or quant manager with a founder led or dual CEO structure, the actionable version of this isn’t “watch for hidden filings.” The filing wasn’t hidden; Bloomberg had it in a day. The actionable version is narrower: know your own fund’s redemption notice period before you need it, and know how many committee meetings stand between “we should redeem” and a notice actually going out. Both numbers are already sitting in your own subscription agreement and your committee’s standing calendar, not in anything Two Sigma or PERA controls. Those two numbers, added together, are the real distance between a headline and a wire transfer, and most allocators only learn them under pressure, mid crisis, instead of in advance.

The Decision-Grade Version

This piece is complete on its own. The thesis, the evidence, and what would kill the view are all above, and nothing was held back to sell you a next step.

The Patreon note is a different piece of work, not a deeper cut of this article. It takes one method from inside this story, a five input audit for measuring your own redemption latency gap before a governance headline forces the question, and writes it the way an ODD team would actually run it: pull the manager’s own Form ADV, size your fund’s notice period, size your committee’s cadence, add them together. Written for people who sit on an investment committee or run operational due diligence for a living.

→ Read the redemption latency audit note

→ Or join the Patreon community for every note

More research like this: my YouTube channel breaks down the filings on screen, and I post shorter reads on LinkedIn.

If your manager’s governance blew up on Bloomberg tomorrow, how many weeks would your own process need before the money actually moved?

Cover photograph: F McGady, CC BY 4.0, via Wikimedia Commons.

Millennium isn’t harvesting a clean success story when it absorbs Jain Global’s outside capital. It’s converting real redemption pressure, a $250 million sovereign-fund withdrawal and a fund’s own admission that it couldn’t reach scale alone, into a deal that captures the fee economics for itself. The trading was never broken. The vehicle that housed it was.

Below the paid line:

• The redemption pressure the headline “harvest” story leaves out: GIC’s $250 million withdrawal, a January 2026 drawdown, and Jain’s own analyst-source naming redemption risk as the reason for the deal

• The corrected arithmetic separating the two real gaps in Jain’s own numbers: the ~7-point capital-timing gap and the ~33-point fee-drag gap, with the fee-waterfall caveats stated plainly

• Kodai Capital's April 2025 wind-down, a $690 million Millennium-backed manager run by Citadel alumni, and why its market-driven collapse complicates any claim of a clean pattern

• The industry pass-through comparison table: Jain, Balyasny, Citadel and ExodusPoint, each with its own disclosed gross-to-net gap

• Jain Global's tiered performance-fee schedule (10% at $250 million-plus commitments) and its 18-month lock-up plus 5% redemption-fee terms, correctly sourced

• The falsifier: what I’m watching for in the next twelve months to know if this is a repeatable playbook

I’ve covered pod shops on this desk before. This is the first time one let me see, in its own disclosed numbers, exactly how much of its investors’ money it took to build the thing before someone else decided it was worth owning outright.

Below: the 32.6-point Jain gap split into its two causes, Millennium and Citadel's own ~10% mature pass-through ratio, the four-fund comparison table, and my September 2027 falsifier date.

The consensus: platform seeding is a smart, symbiotic trade

Talk to anyone who allocates to multi-strategy funds and you’ll get roughly the same account of why Millennium, Citadel and Point72 back independent launches like Jain Global. The platform gets diversification without building a new desk from scratch. The founding portfolio manager gets a credible anchor investor and instant credibility with the rest of the capital-raising circuit.

Outside LPs get early access to a launch that would otherwise be closed to them, priced at whatever terms the manager can command in a hot market. The endowments, sovereign funds and family offices that filled out Jain’s $5.3 billion raise in 2024 are sophisticated allocators who understand pass-through fee structures going in (Business Today). Not first-time buyers.

Frame the seeding relationship as a long-term partnership, and a later decision to consolidate that manager’s book reads as a natural next step, never an extraction. A tidy story, on paper.

I think that account is broadly right about the incentives on day one. My read is that it stops being the whole story once you have two years of numbers in front of you, and I want to walk through why.

The variant view: a redemption story and a fee-harvest story, at once

Here’s the observation that complicates the clean version of this story. Jain Global wasn’t simply thriving when Millennium moved to absorb it, and it wasn’t simply failing either. Both things were true at once, and the article that only tells one half is missing the mechanism.

On the trading side: the fund generated $1.8 billion in gross trading profit against $5.3 billion raised, a cumulative gross return in the mid-thirties to low-forties depending on which capital base you measure against (Hedgeweek). That is not a broken strategy. Profitable, the whole way through.

On the LP side, the picture looks different. Singapore’s GIC, one of Jain’s earliest and largest backers, pulled $250 million in February 2026 (Hedgeweek). That same month, the fund was down 0.9%. A sovereign investor, heading for the door. Rupak Ghose, the analyst whose pass-through estimates this piece leans on, states plainly what was actually driving the Millennium conversation, in his own words:

That’s the article’s own best source, and it cuts against my own framing more than I’d like: on redemption risk, as the actual trigger, I’m not going to dress it up or write around it. I don’t think it kills the fee-harvest thesis either. The two readings don’t cancel out, and the arithmetic below is what shows why.

Jain isn’t the only recent case, either, though the pattern is messier than a clean two-for-two. About four weeks before Jain’s deal closed, in consecutive calendar months, Millennium struck a similar arrangement with Albar Capital Partners, a $1.5 billion market-neutral equities manager run by Javier Velazquez, a former Millennium portfolio manager. Albar’s deal was disclosed August 7, 2026; Jain’s was reported complete September 1-2, twenty-five days later. Albar is returning all outside capital and will run exclusively for Millennium going forward (Hedgeweek, Aug 7, 2026).

Hedgeweek’s own framing of the Albar deal names the pattern directly, unprompted: Millennium is “identifying successful portfolio managers, backing them with external capital and subsequently bringing those relationships into its own capital base” (Hedgeweek).

There’s an earlier case too, and it cuts the other way. In April 2025, Millennium-backed Kodai Capital Management, a roughly $690 million manager run by Citadel alumni Neville Shah and Joon Park, wound down and returned its non-Millennium capital amid a brutal stretch for tech names (Bloomberg). Kodai doesn’t fit “harvest of mature success” at all. A weak-market wind-down, plainly.

Laid out by date, the three read as a widening pattern, not a single template: Kodai in April 2025, driven by markets. Albar in August 2026, closer to a clean harvest. Jain in September 2026, both at once.

The honest count is three cases, not two, and they don’t all rhyme. What connects all three is simpler and less flattering than “playbook”: Millennium absorbs a seeded manager’s book whenever the manager’s outside capital becomes a liability, whether the reason is weak markets, LP anxiety, or a fee structure eating the fund alive.

The capital-timing gap: 34% versus 41%

Start with the piece of the arithmetic that is actually about timing, not fees. Real, but not the story. I want it addressed on its own, and I do not want it buried inside the bigger one that follows. Jain raised $5.3 billion in commitments, but a fund cannot deploy $5.3 billion on day one. Capital ramps in as the team hires, the risk book fills out, the operational plumbing gets built.

Hedgeweek’s own reporting draws exactly this distinction: gross return on capital raised comes to 34%, gross return on capital actually deployed comes to 41% (Hedgeweek). That seven-point gap is the cost of holding uninvested dry powder during a roughly twenty month ramp. A real drag. Nobody’s fault. What a launch this size looks like in its first two years.

I am raising this gap first because it is the one a skeptic can wave away easily, and I would rather it get waved away correctly than folded silently into the bigger number that follows. Every large multi-strat launch of the past decade has carried some version of this drag, ExodusPoint’s own 2018 ramp included. None of it tells you anything except that raising $5 billion faster than you can prudently deploy it costs early investors a few points of blended return. That part of the story is boring. It should stay that way.

The fee-drag gap: 41% versus 8.4%

This is where the story turns. Even measured on the more generous deployed-capital basis, gross return still runs 41% against a compounded net return to investors of 8.4%. I checked that 8.4% against the three annual numbers Hedgeweek reported separately: 0.5% for the six months from launch in July 2024 and 3.7% for full-year 2025 in one piece (Hedgeweek, Jan 2026), and roughly 4% year to date in 2026 in a second, later piece (Hedgeweek, Sept 2026). The January piece predates 2026 entirely and cannot support that third figure on its own.

Compound those three: 1.005 times 1.037 times 1.04. I make that 1.0839, an 8.39% cumulative net return. Close enough to the disclosed 8.4% that I trust this is a real geometric compounding of reported NAV numbers. Not a rounded talking point someone pulled from a press release.

So the gap that actually needs explaining is 41% gross against 8.4% net, 32.6 points on the precise arithmetic. Call it 33. Two separate charges sit inside it. Neither one is small.

The first is the uncapped pass-through expense structure that has become standard at the largest multi-strat platforms: trading technology, compliance, data licenses, portfolio manager compensation, office costs, billed straight to the fund instead of absorbed into a flat management fee. Rupak Ghose estimates Jain’s pass-through ratio ran as high as 15% of assets in 2025 alone, against an average deployed AUM in the $3.5 to $4 billion range that year, and projects it falling to roughly 12% in 2026 as the cost base spreads over a larger book (Rupak Ghose). Fifteen points of expense ratio in a single year, against a fund that gained mid-teens gross that same year, is close to the whole story by itself. Almost the whole gap, in one line. I can’t reconstruct the exact fee-waterfall order that turns those two figures into the reported 3.7% net (see the limits section below).

The second charge is the fund’s own performance fee, tiered by ticket size at launch: 10% for commitments of $250 million or more, dropping in steps for smaller tickets, alongside an 18-month lock-up before any redemption right opens (Hedgeweek). That same lock-up structure explains why outside LPs, GIC included, largely didn’t exit before 2026: an early withdrawal carried a further performance-fee step-up plus a separate 5% redemption fee on top of whatever the market had already taken (Hedgeweek). Staying in was the cheaper option even for an unhappy LP. A lock-up, doing quiet work. Exit was expensive too.

Jain Global has not disclosed the exact order in which pass-through costs and performance fees come out of gross trading gains, and I am not going to pretend I know it. What I can say: an expense ratio running close to gross returns in a strong year, plus a performance fee stacked on top of whatever survives it, is large enough on its own to close most of a 33-point gap. No third explanation needed.

Read more

The consensus: a platform staffs where the money is

Here is the story that writes itself. ExodusPoint just pulled in $2 billion, its biggest capital raise ever, with Abu Dhabi’s sovereign money in the mix. A real number. A real backer. Weeks later, it hires a senior portfolio manager and points him at Dubai to run a ten figure global rates book. The firm manages $14.9 billion by the wire’s own count ($14.5 billion by Bloomberg’s June coverage of the raise, a gap I’ll come back to, the same kind of headline-AUM wedge that shows up at a much larger scale in Citadel’s own SEC filings), and it just took a fresh check from Abu Dhabi Investment Council, a unit of Mubadala. It plants a $1 billion pod in the same city its new backer calls home. It isn’t even the first addition since the raise closed. A Goldman Sachs macro managing director, Daniel Dangoor, joined the same desk eight days after the $2 billion landed. A sophisticated reader spots the shape immediately: a platform following the capital.

The backdrop makes the story easy to believe. Dubai’s hedge fund population isn’t merely growing. It’s compounding. The DIFC counted 102 hedge fund managers as of mid December 2025, more than double the count from the start of 2025, with roughly 80% of them running over $1 billion. Six of the eight largest US multistrategy platforms, Millennium, Point72, Balyasny, Schonfeld, ExodusPoint and Hudson Bay, now keep an office there. A crowded map. Abu Dhabi alone is deploying part of an estimated $1.8 trillion of sovereign wealth into the hedge fund industry. ADIC is separately reported to be building its own hedge fund portfolio worth around $15 billion. Put a $2 billion Gulf backed raise beside a Gulf based hire, made days apart from a second one, and the causal arrow all but draws itself: sovereign money in, sovereign linked pods out. It’s the cleanest version of a story hedge fund reporters have told about Dubai for three years running.

Scale it against the market leader and the pull looks even stronger. Millennium Management, the first of the major multistrats into Dubai, licensed its DIFC entity in 2020 and by September 2024 had grown its local headcount to roughly 100 people, on top of $68.8 billion firmwide. A four year head start. ExodusPoint just cashed the largest check of its own history from the same region.

I don’t think the reciprocity story survives the paper trail as written. But a clean “agglomeration, case closed” rebuttal doesn’t survive it either. I expected, going back through every dated hire one at a time, to find the timeline break cleanly one way or the other. It doesn’t. It does something worse for a tidy thesis: it accelerates, and it accelerates toward the money.

The variant: the office came first, but the pace didn’t stay flat

Here is what actually happened, in order, and it does not sort as neatly as either story wants. ExodusPoint set up its Dubai operations in 2022, years before Abu Dhabi Investment Council wrote a check. Adrian Ahmadi arrived from Point72 at some point after that, undated in the trade coverage I could find. By April 2024 the desk had three more portfolio managers. Valery Ivanov came from Point72, running consumer long/short equity. Omar Soomro came from Garda Capital and Moore Capital, trading emerging markets. Rob Kitchen came from Amia Capital and, before that, BlueCrest, running macro. 2025 added two more. Berhe Tesfayohannes, an FX options specialist out of PIMCO, joined in June. Chris Wheeler followed later that year, though he wasn’t new to the city: he had already been running BlueCrest’s own Dubai desk since 2022, after leaving Citadel for it. Then the pace changed. Daniel Dangoor, a Goldman Sachs macro managing director, joined the Dubai desk on 18 June 2026, eight days after the $2 billion raise closed. Now, roughly ten weeks after that same raise, the addition is Moussaddykine. Two hires inside ten weeks of the largest capital event in the firm’s history. Nothing in the four years before it landed anywhere near that close to a check clearing.

Here is the fact that still complicates the reciprocity story, even with that timeline in hand. Qube Research & Technologies, the systematic shop Moussaddykine is leaving, has no reported Gulf sovereign LP capital of its own. Its disclosed AUM has moved from roughly $23 billion in early 2025 to $38 billion by January 2026, a trajectory the trade press credits to returns, with no capital raise anywhere in the story. Its LP base isn’t public. A closed book. And it still opened a licensed DIFC subsidiary, Qube Research & Technologies (DIFC) Ltd, on 29 August 2023, just under three years before this wire, with nothing in the record to explain it. That date comes from the DFSA’s own public register: license date 29 August 2023, reference F007772, Index Tower, Unit 1801, Level 18, DIFC, Dubai. The register blocks automated access on direct request. An access wall, nothing more. The same address and entity are independently confirmed inside QRT’s own SEC Form ADV, CRD 304552, last amended 31 March 2026, in its books and records disclosure, though not in the filing’s list of disclosed advisory offices. A regulatory record from the firm Moussaddykine is exiting confirms QRT built the same Gulf infrastructure ExodusPoint is now paying him to staff, and no sovereign allocation explains why.

That is still the tell, for the origin question. A firm with zero documented Gulf capital events built the identical Dubai infrastructure a firm with a very large one just built. Same building. Opposite balance sheets. Origin and tempo are two different questions. The tempo is the one Dangoor and Moussaddykine answer differently than the six hires before them did.

The mechanism: two things happening at once, and a third that doesn’t fit either

Two mechanisms explain most of the Dubai buildout, and neither one runs through a single LP’s check. A third pattern, visible only in the last two hires, is the one that actually complicates the story.

The first is agglomeration. Once a critical mass of pods exists in one city, hiring inside that city gets cheaper for everyone, because a recruiting pool already exists and has already been screened by a competitor. Chris Wheeler is the cleanest example of it: he was already running BlueCrest’s own Dubai desk, having left Citadel for it back in 2022, before ExodusPoint hired him across town three years later. Ahmadi and Ivanov both arrived from Point72, Soomro from Garda and Moore. Those are lateral moves inside a set of firms already competing for the same regional bench, nothing to do with anyone’s fundraising calendar. The centre’s hedge fund headcount crossed 1,000 employees by September 2024, against a broader DIFC workforce that had grown 66% since 2019. That’s regional scale.

The second mechanism is personal, and it’s the one the trade press cites most often when it actually asks departing PMs why they moved. Dubai charges zero personal income tax. A senior portfolio manager clearing seven figures keeps meaningfully more of it in Dubai than in London or New York, whether or not his employer ever took a dirham of Gulf sovereign capital. Investment Monitor’s survey data, pulled from a May 2024 HFM Middle East Summit poll of 120-plus hedge funds, lists ease of doing business, visa processing, talent access, timezone coverage, and quality of life among the reasons funds gave for building a regional presence. Tax free comp is a PM level draw on its own, whatever a platform’s investor relations desk is telling Abu Dhabi. Tax beats optics.

Neither mechanism explains Dangoor cleanly. That’s the honest gap. He didn’t come from inside the regional bench the way Wheeler did. He came straight from Goldman Sachs in London, the same path Tesfayohannes took the year before, except Tesfayohannes’ hire sat inside an otherwise quiet stretch of the cadence and Dangoor’s landed eight days after a $2 billion raise. A cold relocation from outside the region proves nothing by itself. Landing one eight days after the largest capital event in the firm’s history is closer to the shape the reciprocity story predicts than to either mechanism above.

Read more

Hong Kong’s carried interest tax expansion is a gazetted bill with a retrospective tax date already written into its text. Singapore’s competing pledge is a press release with no rate, no draft legislation, and a Year of Assessment that doesn’t start until 2027. Those are not the same kind of event.

I put the two governments’ own filings on screen for this one, the gazette clause and the parliamentary answer, and let the nine month arithmetic run rather than just stating it.

The consensus, stated at its strongest

I will say the steelman plainly. On 19 August 2026, the Monetary Authority of Singapore announced three measures in one release (MAS media release): a tax exemption on fund managers’ profit related returns, a hedge fund co investment programme, and a revised immigration track counting performance pay toward the salary bar for senior professionals. Capital, tax and people, moved in one afternoon. The Edge Malaysia headlined it as Singapore answering Hong Kong directly. AIMA’s Asia Pacific co head Kher Sheng Lee put it well: “Two of Asia’s financial centres are going all-in on backing our industry in a big way in the same season” (via The Edge Malaysia).

MAS deputy chairman Chee Hong Tat did not dodge the comparison, saying plainly “we don’t see the competition with Hong Kong as zero sum,” and that “the region is big enough” for both cities to grow (reported by Mothership). The stakes are concrete: asset management is 15% of Singapore’s financial sector output, 13% of its employment, and grew 7.5% a year for five straight years (MAS media release). Real money, real jobs. A government doesn’t roll out three coordinated levers on a Wednesday because it is bored.

The second measure, the Hedge Fund Investment Programme, is a different tool than a tax rate: MAS co investing directly alongside hedge fund managers who commit to building or expanding a Singapore presence, a cheque that lands the moment a firm signs up rather than a deduction due eighteen months out at a Budget speech. It is the strongest lever in this week’s release and the one with the least detail: MAS says only “more details will be shared when ready”: no size, no structure, no vintage. Biggest lever, least detail.

So the consensus read is that Singapore matched or beat Hong Kong’s push, and the strongest form of it is not even in this week’s headlines. Hedgeweek, citing people familiar with the plans, reports Singapore’s changes “could ultimately apply to a wider group of investment professionals than” Hong Kong’s (Hedgeweek), while noting MAS has not yet disclosed the programme’s size or the tax measures’ cost and scope. That is a claim about eventual generosity from unnamed sources, not about today’s paperwork, the distinction the rest of this piece turns on. I do not think the consensus is wrong about the intent. I think it is wrong about the clock.

The variant view: one has a bill number, the other has a due date

Here’s the specific fact that forces a different reading. Hong Kong’s Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 was gazetted on 12 June 2026 (Hong Kong government gazette notice). It had its First Reading in the Legislative Council on 24 June (IRD press release). It is drafted. It has a bill number. It carries a retrospective effective date, Year of Assessment 2025/26, running from 1 April 2025 (KPMG). Carry earned by a qualifying Hong Kong fund since that date is already inside the intended scope once the bill clears its remaining readings.

Singapore’s equivalent, read straight from paragraph 4 of its own release, “is expected to take effect from the Year of Assessment 2027,” and “further details will be announced at Budget 2027.” No rate. No bill. No draft clause. What exists today is a stated intention that a share of fund manager profit will be exempt, contingent on “economic substance requirements, including minimum headcount,” details still to come. Nothing to book yet.

I ran the two effective dates side by side, using each side’s own convention. Hong Kong’s is 1 April 2025, drafted into the bill’s text. Singapore’s own preceding year assessment rule means Year of Assessment 2027 taxes income earned in calendar year 2026 (Forvis Mazars, on Singapore’s YA convention), which puts the exemption’s own effective start around 1 January 2026. That’s a nine month gap in effective date, on top of one entire stage of legislative process, gazettal, that Singapore hasn’t reached yet. Hong Kong has a bill number. Singapore has a paragraph. A hedge fund GP deciding where to book a new carry structure this quarter is choosing between an instrument with a text he can read today and a promise with a due date next February. Those do not discount the same way.

I ran that discount as an actual number in a separate note on Patreon: solving for the bill passage probability at which Hong Kong’s discounted cost equals Singapore’s known rate, and the break even is not where the nine month gap alone would suggest.

The mechanism: why a promise discounts differently than a bill

Rank the two jurisdictions by how far each has travelled toward zero tax carry, and the picture sharpens.

Hong Kong’s base regime has been law since 2021: the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021, enacted 7 May 2021, setting a 0% profits tax rate on qualifying carried interest, retroactive to income accrued from 1 April 2020 (Dechert, on the enacted ordinance). Five years of standing law that Mintz’s own client note calls “underutilized and impractical due to its narrow scope and administrative complexity” (Mintz). Hong Kong’s government reached a similar verdict independently: its November 2024 consultation paper, proposing to widen the regime, cited the certification process and administrative burden as reasons the concession “has not been widely adopted” (KPMG, on the FSTB’s 2024 consultation). All of it was written for private equity style carry, excluding hedge funds almost entirely. Written for someone else.

The 2026 bill fixes that narrowness, building on the 2021 base rather than replacing it: it widens the definition of “fund” to private credit and digital assets, drops the old 5% incidental transactions threshold, and relaxes special purpose entity treatment. 2021 gave Hong Kong a working zero rate for a narrow slice of the industry. 2026, once passed, gives it a working zero rate for most of the rest. That is a government finishing a law it wrote five years ago.

I should be precise here: gazettal is Hong Kong’s formal publication step: a bill becoming a real, numbered legal text open for public scrutiny, which a policy statement never gets. Neither it nor First Reading is passage, but both are further along than anything Singapore has published. Singapore has published nothing.

What the 2026 bill repairs is more mechanical than “expands the definition” lets on. The old regime required carried interest paid through the qualifying person and tied to a hurdle rate in the fund’s own constitutive documents (Legislative Council brief). A hurdle rate is a private equity construct: the GP earns nothing until the fund clears a stated return, then takes its cut above it. Most hedge funds don’t run that structure; they run high water marks against a NAV that resets monthly, with no single “disposal” event. A test shaped for private equity had nowhere to attach. It never did. The 2026 bill deletes the hurdle rate requirement, deletes the mandatory HKMA certification step (Charltons), and lets carried interest flow through a carry vehicle or personal investment entity rather than only “through the qualifying person,” confirmed independently by Baker McKenzie: three specific administrative locks, removed by name. Hong Kong’s FSTB also drew a boundary on 12 August: a proprietary trading business, one trading only its own capital, does not qualify as a “fund” (FSTB response via regfollower). One test, drawn narrow.

Singapore’s own rate: 10%, never once zero

Singapore never had a zero rate carry mechanism. Sections 13O and 13U exempt the FUND vehicle’s “specified income” from “designated investments,” saying nothing about what the fund MANAGER earns. A manager’s own performance fee has always been ordinary income, taxed at up to 24% personally above S$1 million, the top marginal rate since Year of Assessment 2024 (ASEAN Briefing, Singapore individual income tax). Run it through a management company instead and it hits the Financial Sector Incentive’s concessionary 10% corporate rate. That is conditional on a Capital Markets Services licence, minimum staffing, and at least S$250 million under management. Not every manager qualifies. Budget 2025 layered an enhanced 5% tier on top for a manager whose own firm lists on the SGX (DLA Piper), which tells me MAS already knew 10% wasn’t pulling its weight against Hong Kong’s zero. It has never once been zero.

Read more

Citco’s July hedge fund data show the only profitable size bracket was too small to register in the firm’s own flow tables, while the size tier the Bank of England had already flagged as crowded absorbed most of the year’s new money anyway.

The consensus: a down month that didn’t slow the money

I expect most trade coverage to read July the way Citco’s own release invites it to be read. Funds lost 0.8% on a weighted average basis, their first losing month since the second quarter opened. More than half still finished in the black. Investors didn’t blink. No pause at all. $12bn of net new capital arrived anyway. That’s a seventh straight month of inflows, taking 2026’s cumulative total to $86.9bn against $8bn of redemptions on $20bn of subscriptions Citco: Monthly Hedge Fund Update, July 2026. Multi-strategy platforms, the pod shops running dozens of internally netted books under one balance sheet, absorbed $5.3bn of July’s total and $49.2bn of the year’s $86.9bn. That’s 57 cents of every dollar raised in 2026, going to one strategy family. Dispersion between the best and worst performers narrowed too, from 10.9% in June to 9.9% in July, which Citco’s own framing reads as the industry holding together, not fracturing.

I don’t dispute that arithmetic. A sophisticated allocator draws the obvious conclusion from it: multi-strategy funds diversify away single strategy drawdowns, their scale buys better financing terms and faster capital deployment, and investors are simply paying for demonstrated resilience. Scale reads as safety. A clean story. It isn’t an unreasonable belief on its face. I’d call it the same belief that carried Citadel to roughly $570.6bn of regulatory AUM, filed 11 June 2026 SEC: Form ADV, Citadel Advisors LLC, CRD 148826, and Millennium to roughly $720.8bn, filed 31 March 2026 SEC: Form ADV, Millennium Management LLC, CRD 158117.

That’s the story the flow numbers tell on their own, and on their own I think it’s incomplete. The reason sits one table over, in the section Citco’s release never actually cross references against the one above it. I did that cross reference myself, and it changes the read.

The bracket nobody is funding was the only one that made money

Citco reports July performance across five AUA brackets: under $200m, $200-500m, $500m-1bn, $1-3bn, and over $3bn. Exactly one of those five made money in July. It was $500m to $1bn, at +0.2% Citco: Monthly Hedge Fund Update, July 2026; the full bracket table sits behind Citco’s own download form, so I am also citing the independent trade-press writeup that reproduces every figure in it verbatim Hedgeweek: Hedge funds post first monthly loss in three months as July inflows reach $12bn. The under-$200m bracket fell hardest, down 1.6%. The $200-500m bracket fell 0.9%. The $1-3bn bracket fell 1.2%, materially worse than the largest bracket, over $3bn, which fell only 0.7%. I make that a 0.5 percentage point gap, or a 1.7x ratio, between two brackets sitting right next to each other on the size ladder, with the smaller one losing more. Bigger isn’t simply worse here. It isn’t simply better either. The relationship has a floor in the middle. Not a slope at all. That shape is a dip, not a slope, and it is the whole finding.

Now put the flow table beside it, which is the step I think Citco’s own release skips. Citco reports flows across a different, coarser set of brackets: under $1bn, $1-5bn, $5-10bn, and over $10bn. Funds over $10bn took $6.5bn of July’s $12bn, 54% of the month’s entire haul, and $67bn of the year’s $86.9bn, 77%. Funds under $1bn AUA, the segment that contains the one bracket that actually made money in July, took $0.5bn of the month’s $12bn. That’s 4%. Almost nothing.

I want to be precise about what this comparison can and can’t prove, since the two tables use different brackets; I’ll come back to that limit below. But the comparison that survives the mismatch is simple. The flow data are heavily monotonic: more scale draws more capital, almost without exception. The performance data aren’t monotonic at all, in the one month that actually tested them. My read: the market is paying for a relationship July’s own numbers don’t show.

Why I think the mechanism is crowding, not just sector exposure

A skeptic’s first objection here is the right one to raise, and I want to name the strongest version of it, not a softer one. Reuters reported JPMorgan’s own read of July: “crowded bets on technology stocks which, when markets turned sour, prevented speculators from exiting at more profitable levels,” with global funds down closer to 3% by that estimate against Citco’s -0.8% Reuters via Yahoo Finance: Hedge funds’ 2026 gains dented by tech trades in July, JPMorgan says. The gap between JPMorgan’s ~3% and Citco’s -0.8% is itself worth flagging: two credible sources, different scope (a broader industry read against one administrator’s book), genuinely disagreeing on magnitude. I am not resolving that conflict, only disclosing it. Two reads, one month. Equity strategies fell 2.7% in July, the worst of any category, and fixed income arbitrage fell 1.2%, the second worst Citco: Monthly Hedge Fund Update, July 2026.

Weeks before July’s numbers existed, the Bank of England issued two related warnings. Its Financial Policy Committee record named concentration in sovereign-debt-adjacent markets: “many of these markets are characterised by a relatively high use of leverage by a small number of hedge funds pursuing similar trading strategies across jurisdictions” Bank of England: Record of the Financial Policy Committee meeting, 26 June 2026. Its companion Financial Stability Report, published the same week, is the more directly relevant one, and I under-used it in my first pass at this piece: hedge funds’ equity prime brokerage balances “have increased by around 40% over the past year,” with positions “more concentrated in particular sectors, such as semiconductors... coinciding with the ongoing AI-linked stock price momentum” Bank of England: Financial Stability Report, July 2026. Same story, earlier document. That is the JPMorgan story, named by the BoE in advance. The same report ties the two together, warning of “cross-market interconnections if funds making losses on equity positions deleverage across other markets – including sovereign debt – in response” Bank of England: Financial Stability Report, July 2026. Read that way, the gilt-market warning is the spillover channel out of the same equity crowding JPMorgan later blamed for July’s losses, not a separate, more dramatic risk I reached for instead. One risk chain, two documents.

I will not oversell how rare this warning is. Similar language recurs close to continuously: BlackRock issued its own crowding warning in April 2026. The FPC named the mechanism in advance. It did not predict July, and I am not claiming it did.

What crowding actually means in practice

Here is the mechanism, stated plainly. At the scale Millennium, Citadel and Point72 operate, a fund cannot run one differentiated book. It runs dozens of pods across equity, fixed income relative value, macro and credit at once, each internally levered and centrally risk managed. The largest of those platforms end up running similar factor exposures to each other, almost by construction, because they recruit from the same talent pool, finance through the same prime brokers, and get marked against the same peer set every quarter. No single fund has to be reckless for a shock to spread. Same desks, same moment.

The Fed’s own Form PF-derived analysis puts a number on the underlying condition: large hedge funds’ gross US Treasury exposure sat near $4.0tn as of September 2025, split into $2.4tn long and $1.6tn short, netting to only about 20% of the gross figure Federal Reserve: FEDS Note, “Decomposing Hedge Funds’ U.S. Treasury Exposures,” Phillip J. Monin, 22 June 2026. I would call that a footprint problem: a 20% net position hiding under an 80% gross one is not risk in the traditional sense. It is leverage that has to unwind through the same small set of financing desks the moment sentiment turns. Gross is the footprint. Net is not the risk. Financing is what breaks. Intuition: a cash futures Treasury basis trade borrows short term cash to buy Treasuries while selling futures against them, capturing a small, heavily levered spread; it works fine until financing costs or margin calls force everyone running it to unwind at once.

Does the edge survive at this scale, or is July the capacity limit showing up

Every claim about an edge, including the scale buys safety belief the flow data are pricing, has to answer whether it still works and at what size it stops. Multi-strategy’s pitch to allocators has always been that internal netting across dozens of pods creates a smoother return stream than any single strategy could on its own. For years that pitch has been broadly right, and I am not arguing it is suddenly false. Q1 2026 returned -1.4% on $24.1bn of inflows. Q2 returned +12.3% on $39.2bn of inflows Citco: 2026 Q1 Hedge Fund Report; Citco: 2026 Q2 Hedge Fund Report. Money kept arriving through both a loss and a record gain, and inflows rose 63% quarter over quarter into the record. The loss did not slow it. The gain did not explain it either. Return was not the variable. Slot scarcity was. They are pricing something closer to a franchise bet: the biggest platforms keep absorbing capital regardless of any single quarter’s result, because redeeming from a top tier multi-strategy fund means losing your allocation slot for years.

That franchise bet is what breaks the netting argument’s capacity logic, in my read. Netting only smooths returns if the pods are truly uncorrelated with each other. Once a platform’s pods draw from the same strategies and financing lines as its biggest competitors, and the FPC’s language says several already do, the netting benefit shrinks right as allocators pay the biggest size premium for it. The edge has not disappeared. It is concentrating its cost on the tier just below the top, the tier that keeps raising money on the giants’ reputation.

Here is the concession that actually damages my own case. The $500m-$1bn bracket that made money draws so little new capital that Citco’s flow table cannot break it out on its own, so I do not know how many funds sit inside it, or how much one idiosyncratic quarter could swing its average. I am reading a real signal out of a sample I cannot size. A thin bracket, one quarter. The same caution cuts against the over-$3bn bracket too: a bracket average is not a claim about any one fund inside it, and I have no per-fund July return for Citadel, Millennium or Point72. Nothing below treats “the giants held up better” as a claim about any specific name.

I have seen a version of this shape before. The swap-financed version of the Treasury basis trade unwound sharply in the April 2025 tariff shock; the cash futures version of the same underlying trade held up comparatively well through the same episode Dallas Fed: How sensitive is the Treasury cash-futures basis trade to funding condition shifts?. One trade, two speeds. The crowded one broke first. Depth mattered more than size. I am not claiming July repeats that mechanism exactly. I am pointing at the pattern: the break tends to show up first in whichever version of a crowded trade is thinnest on financing depth, not whichever is biggest in dollar terms.

The discriminator: concentration, not simply size

If sector exposure alone explained July, I expected a roughly linear relationship between AUA and return, the biggest funds suffering most because they run the most of the worst performing strategies. I did not get one. A dip, not a slope. The over-$3bn bracket, at -0.7%, held up better than the $1-3bn bracket, at -1.2%. The giants were not the worst performers. Not close, in fact. The upper middle tier was, and that detail is the whole ballgame.

One number, one reading. I read that as evidence for the crowding mechanism specifically, over a pure exposure story, for one reason. The $1-3bn bracket is exactly the size at which a fund has typically adopted the multi-strategy playbook, internally levered pods, cross asset books, aggressive financing terms, without yet having the pod count, the diversification, or the negotiating leverage with prime brokers that a $10bn-plus platform has spent a decade building. It has taken on the crowded trade set without the balance sheet depth to absorb a shared unwind as smoothly as the very largest funds can. The over-$3bn bracket’s relative outperformance against $1-3bn is not proof that scale insulates you from crowding. It is closer to evidence that scale buys a softer landing inside the same crowded trade. That is a meaningfully different claim. A less comforting one, too, if you happen to run, or allocate to, a $1-3bn multi-strategy shop.

I cannot fully separate these two explanations from Citco’s published tables alone, and I would rather admit that than paper over it. Citco does not publish a return breakdown crossed by strategy and size in the same table, so I cannot show directly that the $1-3bn bracket’s excess loss traces specifically to equity and fixed income arbitrage exposure rather than some other factor at that size tier. What I can show: the pattern matches the mechanism the Bank of England named in advance, a pure size story does not fit the shape of July’s numbers, and the strategies that fell hardest are the ones multi-strategy platforms run at the largest combined scale.

Three limits a careful reader should hold onto

Three honest caveats belong here, stated before a reader who tracks this data finds them alone. First, Citco’s performance brackets and its flow brackets aren’t the same segmentation, and Citco doesn’t reconcile them in its own release. My comparison holds at the level both tables agree on: the largest funds draw the overwhelming majority of new capital, while the mid-size bracket that actually made money draws a rounding error. Two tables, not one. Neither answers the other. I can’t state a single fund’s exact size, flow and return pairing from public data alone, and I don’t think anyone publishing on this topic currently can either.

Second, Citco is a fund administrator. It doesn’t run a universal registry, and its data cover funds that use Citco’s administration services, a large and diverse sample, but not the entire hedge fund universe, and a different administrator’s book could show a different distribution. This is a different data source than HFR’s asset growth figures, which I used in a companion piece on the second quarter’s record capital expansion Hedge Funds Just Posted Their Fastest Growth in History. The two providers measure overlapping but distinct populations. I haven’t reconciled Citco’s July return against HFR’s index for the same month; that’s a separate piece of work I haven’t done yet.

Third, one month of divergence between flows and returns is exactly that: one month. I checked the return compounding myself, and it roughly holds together. Citco’s own quarterly reports put Q1 2026 at -1.4% and Q2 2026 at +12.3%, and compounding those two figures with July’s -0.8% gives (0.986)(1.123)(0.992) = 1.098, a 9.8% year-to-date gain against Citco’s own stated 9.7% figure. Close enough that I’d call it a monthly reweighting artifact. The flow figures are a different story, and I want to flag it rather than let a clean returns check imply the flows check out too. Citco’s own Q1 ($24.1bn) plus Q2 ($39.2bn) plus July ($12bn) sums to $75.3bn, not the $86.9bn cumulative figure this piece uses throughout, and Citco’s own June update separately put H1 2026 inflows at $70.4bn, which itself does not sum from the two quarterly reports. I can’t reconcile $86.9bn from the article’s own component figures, and I don’t think a reader should have to take my word that it nets out. The likeliest explanation, based on how administrator flow data usually works, is that Citco revises its cumulative figure upward between releases as more constituent funds report on a lag, so the $86.9bn is probably a more complete, later count than the sum of the original quarterly releases, not a contradiction of them. I haven’t confirmed that mechanism from Citco directly, so I’m disclosing the gap rather than asserting the explanation as fact. The 77% and 57-cent shares in this piece both use $86.9bn as their denominator and would move if a future report restates it.

What would change my mind by August

The falsifier is specific and dated.

I’d also want to revisit this if a future Bank of England or Federal Reserve publication walks back the crowding language, or if Citco starts publishing a joint strategy-by-size breakdown showing the $1-3bn bracket’s underperformance traces to something other than equity and fixed income arbitrage exposure specifically. None of that has happened yet. A dated claim, not a hedge. All of it is checkable within a month or two, which is exactly why I’m dating the claim instead of hedging it.

What a PM does with this before the next allocation

For a PM sizing a new allocation into a multi-strategy platform on the strength of July’s flow data alone, I think this month argues for asking a narrower question than AUA. The question isn’t how big the fund is. It’s how much of its book sits in the same crowded equity and fixed income arbitrage trades the Bank of England named in advance, and whether its financing terms and pod diversification look closer to the over-$3bn tier’s demonstrated resilience or the $1-3bn tier’s demonstrated exposure. I’m not arguing multi-strategy’s underlying edge is gone. The structure has a real, multi-year record behind it, and one month can’t erase that. My own watch item is narrow: the $1-3bn bracket, specifically, in August. If it recovers in line with the rest of the industry, July was noise. Simple as that. I’ll say so. If it lags again while over-$10bn platforms keep drawing the lion’s share of new capital, that’s the pattern worth re-underwriting, not the strategy itself.

Which raises the narrower question I’d want answered before I made the next allocation call myself: for the size bracket capturing 77 cents of every 2026 dollar, how much of that premium is paying for genuine risk infrastructure, and how much is paying for exposure to a trade the Bank of England had already flagged as crowded?

I ran the dollar arithmetic on what the $1-3bn bracket’s gap actually costs a real allocation, and I’m tracking the one number that would prove or kill this read into Citco’s August release, in a companion note: The Bank of England Flagged This Crowding in June. Citco’s July Data Show the $1-3bn Multi Strategy Tier Paid for It.

For related coverage of the same platforms’ balance sheets, I wrote about the second quarter’s record capital expansion here: Hedge Funds Just Posted Their Fastest Growth in History.

I post the full research video series on YouTube: The Mathematical Trader. Connect on LinkedIn.

📊 The Decision-Grade Version

This piece is complete on its own. The thesis, the evidence, and what would kill the view are all above, and nothing was held back to sell you a next step.

The Patreon note is a separate piece of work rather than a deeper cut of this article. It takes one read from inside this story, the size-tier allocation question the flow data is currently mispricing, and works the arithmetic a PM would actually run: the dollar cost of the gap at real allocation sizes, and the one number that would prove or kill the read before Citco’s August release. Written for people who put capital behind a view.

→ Read the size-tier crowding note

→ Or join the Patreon community for every note

Cover photograph: Michael, public domain, via Wikimedia Commons.

The claim: D.E. Shaw’s new four year exit window isn’t primarily a defense against a redemption run. It’s one of three interchangeable levers, price, quantity and duration, that a fund pulls when its edge stops scaling with the capital behind it. The fee data shows platforms are pricing the duration lever without paying investors the discount the option-pricing literature says it’s worth.

The numbers: D.E. Shaw’s Composite fund now takes 4 years to fully exit (6.25% released each quarter, starting 1 Jan 2027), and Oculus 3 years (Bloomberg via Investing.com, 3 Jun 2026) · established platforms charge 1.8% + 20% in their standard share class against 1.4% + 17% at newer managers offering real quarterly liquidity (Seward & Kissel, 2025) · Citadel already runs 30% of investor capital on a rolling two year lock-up against a 1/16th-per-quarter class for the rest (KBRA, 21 Apr 2026).

The catalyst: D.E. Shaw’s new terms bind on 1 January 2027. Seward & Kissel’s next Established Manager study, usually published mid-year, will show whether the fee gap against newer managers widened or closed.

Wrong if: a major platform’s next extended-duration share class ships with a fee discount sized to the added lock-up, in the 2.65 points a year or more the option-pricing literature’s own table implies for a two year lock-up alone. I’d also be wrong if the fee gap above narrows instead of widening.

D.E. Shaw’s own explanation, and why it holds up

Start with the strongest version of what D.E. Shaw actually said, because it’s not spin.

In June, D.E. Shaw told clients it was stretching the time it takes to fully exit its Composite fund to four years. Its second largest fund, Oculus, moves to three. Neither Bloomberg’s report nor D.E. Shaw’s own statement says what the prior exit timeline was, so I won’t guess at it. Composite investors can now withdraw 6.25% of their assets per quarter starting 1 January 2027. Oculus investors are capped at 8.3% a quarter. The firm said the changes respond to “a broader industry trend of tighter liquidity terms that help protect portfolios and funds,” and that it had studied competitors’ terms and concluded its own funds “were not in the best position for success in future crises.” Bloomberg named the comparison directly: the move “joins similar actions by peers including Millennium Management and Citadel in seeking to keep client cash for longer periods.” Bloomberg via Investing.com

That comparison checks out, and it predates D.E. Shaw by years. Millennium put in place a plan to stretch its full redemption period from one year to five, a program it has kept expanding since. Citadel takes up to four years to fully withdraw cash for a large share of its capital. Hedgeweek Balyasny told clients in 2023 it would lock new money up for two years, then in 2024 capped quarterly withdrawals on new capital at 8.3%, roughly a three year exit, down from a prior 25% a quarter pace that let investors leave in about a year. Brevan Howard’s shift is the starkest of the group. Around 70% of its $11.4bn Alpha Strategies platform now sits in share classes that need at least two years for full redemption, against a three month notice period on the same capital three years earlier. Hedgeweek

There’s real science behind calling this protective, and it is not just a talking point. A 2021 Federal Reserve staff paper on the March 2020 Treasury crisis found that funds with stricter share restrictions pulled back less from Treasury market making, because their capital couldn’t run. Its own number for the median fund at the time: “at least 30 days notice before the first 1% of investor capital (net asset value) is redeemed.” Federal Reserve Intuition: a lock-up is a contractual promise, agreed up front, that capital cannot leave before a set date. A gate is different. It’s the manager’s own emergency power to block withdrawals mid-crisis, used after the fact. Locked-up capital can’t demand its money back into a falling market, so the fund never has to sell a position it likes at a price it hates just to make an investor whole. That is a genuine stabilizer, and I think it is the honest half of D.E. Shaw’s explanation.

The same constraint, three different levers

Here is where I depart from the official story. I think the explanation is incomplete, and I want to be clear that I don’t think it’s wrong.

A fund’s edge doesn’t scale with its capital forever, and I’d start there because I think everything else follows from it. Add another dollar and eventually it either dilutes the return on every existing dollar or forces the manager into trades with a worse edge. Every manager I can think of who ran money long enough hit that wall. What varies is which lever a firm pulls in response, and I count three that keep showing up in the public record: raise the price of running the money, cap the quantity you run, or extend the duration you get to hold it for. Duration, as I’d define it here, buys time to hold a position through volatility without being forced out. Quantity caps the size of the book against the depth of the market it trades. Price, as I’d put it, simply rations demand.

Chris Rokos pulled the first two levers in the same twelve months D.E. Shaw pulled the third. His $22bn discretionary macro fund had gained around 21% for full year 2025. Hedgeweek In July 2025 Rokos Capital told investors it would raise its management fee by 75 basis points over three years, to 2.75%, and its performance fee from 20% to 25% over the same stretch. Investors who disagreed were offered a chance to redeem instead. A firm representative said nobody took it. Hedgeweek A few days later, the firm capped assets at $20bn and said it would start handing money back on a pro rata basis, citing “talent constraints and limited capacity in certain macro strategies.” Hedgeweek On the reported “more than $22bn” against a $20bn cap, that is at least $2bn walking back out the door. I did that arithmetic myself from the two disclosed figures. Neither article states the return figure outright.

I don’t think that is a coincidence of timing, though I’ll admit Rokos’s own quote hedges between two reasons at once, “talent constraints and limited capacity,” and I cannot cleanly separate a retention story from a market-depth story in one sentence from one press release. Still, Rokos runs discretionary rates and macro through a single risk-taker, and his capacity is bounded by how much of a specific instrument he can move without moving the price against himself. A longer lock-up does not make the government bond futures market any deeper, so duration doesn’t fix that constraint. Size and price do. D.E. Shaw, Millennium, Citadel and Balyasny run internally levered, pod-based multi-manager books, where the binding constraint is closer to the one the Fed paper measured: can the fund hold its book through a shock without an investor forcing a sale at the wrong moment. Duration fixes that constraint directly. My read is that the lever a fund reaches for is a tell about where its own capacity constraint actually sits, and a London discretionary macro shop and a New York multi-strategy quant platform chose opposite tools for what looks, from the outside, like the same problem.

I hold this loosely. It’s a tendency I think I can see, and I would not call it a law. D.E. Shaw itself has pulled the quantity lever before, for capacity reasons: it returned client profits most years since 2018 to keep its funds from outgrowing their opportunity set. Investing.com/Bloomberg In January 2026, five months before extending Composite and Oculus to their new terms, it broke that habit and kept the cash instead. One fund reaching for two different levers inside a single year doesn’t wreck the pattern I’m describing, but it does mean I am reading a tendency from a handful of cases, not a law.

Read more

On 2 August, Blue Owl hired Takeo Ikemori into its Tokyo office as head of Japan institutional capital. He spent sixteen years at Barclays and ran Natixis’ financial institutions group in Tokyo before that. He shares the Japan representative role with Yoichi Nakamura, who runs private wealth in the country.

I’ve read maybe forty versions of this story over the years and they all say the same thing. Big American manager opens a seat in Tokyo. Asia is the growth market. Everyone’s doing it.

My problem with that reading is that it’s incurious. It never asks which seat, or what the seat is replacing.

The consensus: Japan at 5-15% against 40% elsewhere

Here is the strongest version of the view I’m departing from, and most of it is simply correct.

Japanese institutions are the most under allocated large pool of capital in the developed world. CJ Morrell of Fiera Capital puts Japanese institutional allocations to private markets at “five per cent to 15 per cent” against “around 40 per cent in Canada, the US and Western Europe,” and describes Japan Inc as “still very much stuck in that 60 per cent debt, 30 per cent equity, 10 per cent hedge fund/alternatives.” He calls it “the very early stages of what I think will be a multi-decade move to embrace private markets.”

The mandate side is moving too. Japan is steering its $1.8 trillion public pension fund toward alternatives, which sat at 1.7% of holdings as of March against a 5% ceiling.

So: enormous pool, structurally under weight, mandate pushing the same direction, a decade of runway. Every large alternatives manager should be staffing Tokyo. Blue Owl’s Co-CEOs said as much in the June quarter release, crediting “the diversification of our business across platforms and geographies.”

I sign all of that. I read it as the right description of Japan and an incomplete description of Blue Owl.

Credit fundraising fell 69% while AUM rose 12%

Blue Owl’s June quarter looks fine from the top. AUM reached $319.0 billion, up 12% year over year. Fee-Related Earnings were $392.2 million and Distributable Earnings $351.2 million, both up 9%. The firm declared its $0.23 quarterly dividend.

Now open the fundraising page of the same deck, which is where I think the story sits.

Total equity fundraise was $7.6 billion in the quarter, against $12.1 billion in the June quarter of 2025. That’s a decline of 37% in the rate at which new equity arrives. AUM grew 12% while the intake that produces future AUM fell by more than a third.

Split it by platform and the decline concentrates in one place:

Segment figures are rounded independently to $0.1 billion, so the columns do not foot exactly to the stated totals.

Credit equity fundraising fell 69% year over year, from $5.8 billion to $1.8 billion. Credit is the franchise. It houses the direct lending business, the non traded BDCs, and the brand.

One thing I have to flag before leaning on that number, because it cuts against me: the 2Q’25 base was itself a record quarter for the credit platform. Measuring a soft quarter against a record makes any decline look worse than it would against a trailing average. The fall is real and large on any base I can construct, and it is not as clean as 69% implies.

Split the same quarter by channel and it resolves further. Private wealth equity fundraise was $1.7 billion. Institutional equity fundraise was $5.9 billion. Those add to the $7.6 billion total. On a trailing twelve month basis it runs $13.8 billion private wealth against $26.1 billion institutional.

Institutional money is already carrying roughly three quarters of the intake. I’d note that’s at a firm whose growth story for four years was the wealth channel.

The portfolio is running in place

One more number from the same deck, and I think it’s the most under quoted figure in the release.

Direct lending originations were $3.6 billion in the quarter, and net deployment was $0.6 billion. Over twelve months, originations were $33.2 billion against net deployment of $6.3 billion.

Roughly four fifths of what Blue Owl originates is replacing something that repaid. A lender doing $33 billion of gross origination to grow the book by $6 billion is running hard to stay near the same place. That is not a solvency observation and I don’t want it read as one, because repayments are the healthy way for a credit book to generate liquidity. It’s a growth observation, and it explains where the cash to fill the redemption queue comes from.

The queue, and the arithmetic of 27 cents

Blue Owl Credit Income Corp, the non traded BDC known as OCIC, received $3.6 billion of repurchase requests in the June quarter, down from $4.2 billion in March. Those are 18.8% of shares outstanding, down from 21.9%, against a repurchase cap of 5%.

Work the ratio, because the ratio is the thing.

An investor who asked for a dollar back in the June quarter received about 27 cents. In March they received about 23 cents. OCIC’s own filing publishes exactly these fill rates, “representing 22.8% of each shareholder’s tender request” in the first quarter and “approximately 27%” in the second, so this is the issuer’s arithmetic and not merely mine. The improvement is real and I won’t wave it away. It’s also a move from very gated to gated.

Those two percentages let me back out the fund’s size, which Blue Owl does not disclose directly:

Two quarters, two independently reported percentages, implying the same roughly $19.2 billion of OCIC net asset value to within about 0.15%. A 5% gate on that base is roughly $958 million a quarter of capacity against $3.6 billion of demand.

The number that stopped me is on the other side of the ledger. OCIC has taken in about $1.2 billion of total capital inflows year to date, including roughly $790 million of subscriptions and an estimated $380 million from dividend reinvestment, which the filing itself flags as an estimate. So the fund gathered $1.2 billion across six months while being asked for $3.6 billion back in three. That’s the ratio I keep coming back to.

Blue Owl’s answer to this is worth putting in its own words, because it’s a good one. Quarterly repayments run “typically 6-8% of total assets” against tender offers of 5% of net assets, OCIC has taken $2.7 billion of ordinary course repayments year to date at “approximately 1.4x coverage of share repurchases,” and the fund “does not need to sell a single private loan to satisfy the tender offer.” I accept all of that. It’s an argument about whether the queue is fundable, and my argument is about what the queue does to sales.

This is not a Blue Owl specific failure. Apollo, Ares, Morgan Stanley, HPS, Cliffwater, Monroe and Blackstone all saw requests exceed 5% and held repurchases at the cap. I flagged the structural headwinds in multi strategy funds’ private credit expansion last November, when the strain sat on the manager side rather than the wealth channel. Robert A. Stanger data reported by the Wall Street Journal size it. Investors asked for $15.6 billion back and received $5.9 billion in the June quarter, against $13.9 billion and $7.4 billion in March, while new money into private credit funds fell to around $500 million in May, the smallest inflow in at least eighteen months.

The industry’s fill rate fell from 53% to 38% while Blue Owl’s rose from 23% to 27%. Blue Owl is improving off a base materially worse than its peer group. Oaktree shows the gate can open again: its requests dropped to 4.5% of shares from 8.5%, under the cap, so its queue cleared in full.

On cause, I’d be careful. There is some credit evidence: 6.4% of private credit loans carried “bad PIK” at Q4 2025, interest deferred mid loan under liquidity strain, which Lincoln International treats as a shadow default rate implying distress near 6% against a headline near 2%. But Fitch reads the redemptions as sentiment driven, and the sharper diagnosis in that same analysis is product design: “semi-liquid” was sold as “something meaningfully more accessible than the quarterly cap mechanics permit.” I find that more persuasive, and it matters: a sentiment queue can reverse and a credit queue can’t.

What the gate actually costs, which is less than it looks

Here’s where I have to argue against my own framing, because the obvious next move is to say that 85% of Blue Owl’s fees sit in vehicles with redemption queues, and that would be misleading.

The firm reports Permanent Capital of $225.0 billion and states it generated 85% of FRE management fees over twelve months. Its defined term concedes that permanent capital includes products that “may have periodic tender offers or redemptions.” I thought that was a revelation until I checked the peers. Blackstone, Apollo, Ares and KKR all write functionally the same caveat into their own permanent capital definitions. Blackstone’s 10-K carves out vehicles “where required redemptions are limited in quantum, such as interval funds.” So I read it as industry standard language, and I think anyone selling it as a gotcha is overreaching. I nearly did.

So I sized the actual exposure, which is the part I haven’t seen anyone do. OCIC’s roughly $19.2 billion is about 8.5% of the $225.0 billion permanent capital base. A full quarter at the 5% cap removes about $958 million of NAV. OCIC’s base management fee is 1.25% of net assets annually, charged on equity and not on leverage, so that removes about $12 million of annualised fee income, against $392.2 million of Fee-Related Earnings in the quarter.

So the gate is not an earnings event. Two or three basis points of FRE is noise, and redeemed NAV is partly replaced by fresh origination anyway. What the queue actually does is kill the sales channel. My reasoning is that no adviser puts a client into a vehicle that returned 27 cents on the dollar last quarter, and I’d expect that to show up exactly where it did: $1.8 billion of Credit fundraising where there used to be $5.8 billion. I want to be clear that this step is inference. I have the gate and I have the fundraising collapse, and I do not have an adviser survey sitting between them. The damage is to the growth rate, and the growth rate is what a manager’s multiple is made of.

I’ve written the tradeable half of this argument separately: the Blue Owl gate note on Patreon prices the gate against the fee base and works the October filing sequence the way a desk would.

That reframing is what makes the Tokyo hire legible. Blue Owl doesn’t need Japan to defend this year’s fees. It needs Japan to replace a distribution engine.

The timing lever, which is a rate differential

Japanese institutions finally have yield at home. The 10 year JGB is trading near 2.78%, having touched 2.901%, levels last seen in 1996, up more than 70 basis points this year. The Bank of Japan’s policy rate is 1.00% after a June hike. For the first time in a generation a Japanese institution can buy duration domestically with no credit risk and no hedging cost. On that evidence, funding an American direct lender looks like the worse trade.

The binding constraint on Japanese outbound credit was never the JGB yield. It was the cost of hedging the dollar back to yen, which runs at roughly the short rate differential between the two currencies.

The hedge cost proxy has more than halved, because the Fed cut toward 3.50-3.75% and the BOJ hiked at the same time, from both ends at once.

Two limits on that calculation, and the second is the serious one. The short rate differential is a proxy: real hedged returns also carry the cross currency basis, which is persistently negative for yen and which I can’t observe precisely from public data, so the true pickup is somewhat worse than the proxy implies. And rising JGB yields raise the domestic bar in the same window that hedge costs fall. Both effects are live simultaneously, and the article’s claim is only that the second moved further than the first.

Why Yamamoto’s exit is the weaker of my two discriminators

The rival explanation fits most of these facts. It’s an industry land grab, and the case is stronger than I’d like: Apollo is expanding its Asia private wealth staffing after raising close to $5 billion from wealthy Asian investors, and Ares closed a $2.4 billion Japanese data centre fund in 2025. Tokyo in 2026 is crowded with people making this trip. Blue Owl also launched an insurance solutions platform in 2024 and hired a leader for it in May 2026, so a firm wide institutional pivot predates this hire by two years.

Two things still discriminate, and neither is decisive alone.

Blue Owl is backfilling. Takeshi Yamamoto was a managing director at Blue Owl Japan. In April he left to become head of capital formation for Japan at Benefit Street Partners, Franklin Templeton’s private credit arm, where he now argues publicly that “private credit is at a clear inflection point” and that Japanese institutional investors “have been under allocated compared to their global peers.” I’d weigh this less heavily than I first wanted to. Senior Tokyo coverage bankers are being poached across the sector right now, and I think a four month search for an outside hire is ordinary.

The seat is institutional and separate. Nakamura runs private wealth, and has since he joined from Algebris. Ikemori’s book is banks and insurers: he led coverage of Japan’s largest financial institutions at Barclays and ran financial institutions at Natixis Tokyo. Splitting Japan into a wealth seat and an institutional seat, and filling the institutional one with a balance sheet banker, is a statement about which pocket the firm now underwrites.

Four things I can’t rule out

I cannot prove the Credit collapse is a wealth channel story. Blue Owl publishes fundraising by platform and fundraising by channel, and it does not publish the intersection. So I can show that Credit intake fell 69% and that wealth intake is small, and I cannot show from the disclosures that the fall happened in the wealth channel. Institutional pullback from direct lending would fit the same two tables. This is the weakest joint in the argument and I’d rather name it than let a reader find it.

The money may not be fungible into the hole. This is the objection I’d lead with if I were arguing against myself. Nothing guarantees Japanese institutional dollars land in the direct lending sleeve that’s bleeding. Ikemori’s stated mandate spans private credit, real estate and GP stakes, and Blue Owl’s institutional inflows this quarter went to net lease, real estate credit, investment grade credit, direct lending and GP minority stakes, which is a mix. Japan could diversify the institutional base without ever touching OCIC’s problem.

Global LPs are rotating away from exactly this product. A 2026 Rede Partners survey found roughly 70% of institutional LPs expect to diversify beyond direct lending, with only a small minority planning to increase mid market direct lending allocations, citing spread compression and underwriting standards. That is a structural headwind to the institutional bid, and it is independent of anything Blue Owl did.

Japanese money is currently going the other way. Japanese investors were net sellers of foreign bonds on a large scale in early 2026 as domestic yields rose, and GPIF has signalled its alternatives build will tilt toward domestic projects. I take that seriously: the repatriation trend is real, and it cuts directly against a story about Japanese capital funding American credit.

The causal arrow may point the other way. Japan may be the next market on a plan drawn in 2023 when the Tokyo office opened, with the funding stress a coincidence of timing. I can’t see the internal calendar. And the clocks don’t match: a relationship led institutional build in Japan takes years, while the fundraising hole is quarterly.

What would change this view: the late-October print

Blue Owl reports September quarter results in late October 2026, with OCIC’s tender result in the same window.

I’m wrong if Credit equity fundraising recovers toward its $5.8 billion year ago quarter without institutional or Japanese money doing the work, and OCIC’s requests fall under the 5% cap so the gate stops binding. That combination says the wealth channel healed on its own and Tokyo was ordinary expansion.

I’d count it confirmed if Credit intake stays near $1.8 billion while institutional share rises again and Blue Owl starts naming Japanese institutions in its capital formation commentary.

The cleanest single tell is OCIC’s subscription line. Watch whether inflows climb back toward the $3.6 billion quarterly exit demand. That gap, not the fee line, is the thing that has to close.

What I’d actually do with this

If you own OWL, stop underwriting the redemption queue as an earnings risk. It isn’t one, and the arithmetic above says so. Underwrite the distribution risk instead: the wealth channel that produced $5.8 billion of Credit equity a year ago produced $1.8 billion last quarter, and no plausible Japanese institutional ramp replaces $4 billion a quarter within a year. The stock fell 68.2% from its January 2025 peak of $25.02 to $7.95 on 2 April 2026, so the market has priced something. I can’t tell yet whether it priced a fee cut that isn’t coming or a growth rate that is actually broken. That’s the question I’d want answered before I sized anything.

If you’re a credit allocator, note that the whole industry’s wealth channel is gated at 5% at once. That makes the marginal buyer of US direct lending paper more likely to be an insurance or balance sheet account than an American wealth platform. Balance sheet money prices differently and holds through drawdowns that would trigger a retail queue.

If you’re competing for the same Japanese capital, the hedge cost window is a rate differential and rate differentials close.

I covered Blue Owl’s OBDC merger termination and its NAV discount in February, when the pressure sat in one vehicle and read as a governance problem. Six months on I read it as a distribution problem, which is a different and larger thing.

So here’s the question I’d put to anyone who underwrites managers for a living. OCIC gathered $1.2 billion in six months while being asked for $3.6 billion back in three. At what ratio does a perpetual vehicle stop being a growth engine and start being a runoff book? I don’t think Blue Owl is near that line. I do think it’s the only line that matters now, and I haven’t seen anyone put a number on it.

📊 The Decision-Grade Version

This piece is complete on its own. The thesis, the evidence, the confounds and the dates that would kill the view are all above. Nothing was held back to sell you a next step.

The Patreon note is a separate piece of work. It takes one decision from inside this story: pricing the redemption gate against the fee base, timed to the October tender print that lands four weeks before Blue Owl reports. It writes that the way a desk would act on it, with the arithmetic shown, the crowding constraint sized, and the outcomes that confirm or kill the read. Written for people who put capital behind a view.

→ Read the Blue Owl gate trade note

→ Or join the Patreon community for every note

Elsewhere: YouTube for the video breakdowns, and LinkedIn for the shorter reads.

Cover photograph: Ajay Suresh, CC BY 4.0, via Wikimedia Commons.

Man Group’s own framing of its first half of 2026 is a diversification story, and at the firm level the framing holds up on the numbers. Robyn Grew told shareholders that “the exceptional net inflows and record AUM we are reporting today are the direct result of deliberate, multi-year investments in the diversification of our business.” AUM hit an all-time high of $253.6 billion, up from $227.6 billion at the end of 2025 — driven by $19.8 billion of investment performance and $7.1 billion of net inflows, which together with a small negative FX/other adjustment reconcile the full move (227.6 + 7.1 + 19.8 − 0.9 = 253.6). Net inflows ran 3.4 percentage points ahead of the industry — Man Group’s own asset-weighted calculation against HFR/Morningstar/Citi data, which by its own footnote excludes several AUM categories (infrastructure managed accounts, real estate, US private credit, CLOs), not an independently audited industry statistic. Flows were spread across long-only credit ($4.8bn), long-only equity ($1.5bn), private markets ($0.7bn) and liquid alternatives ($0.1bn). Bloomberg’s coverage led with the record-AUM framing, and the market agreed: shares rose 5.7% to 317 pence on the results.

A sophisticated reader already knows large multi-strategy managers diversify across products; that fact alone isn’t the article. The specific, testable claim underneath it is narrower: one of those product lines — systematic long-only, the quantitative equity business run through Man Numeric — has a net-flow number that has been dominated by single institutional decisions for three consecutive reporting periods, in both directions, and that changes what the category’s headline growth or contraction figure actually tells an outside reader.

The three-period pattern, with the primary numbers

Q3 2024 (outflow): Man Group disclosed in its Q3 2024 trading statement that a single client’s full exit from systematic long-only — first flagged with the H1 2024 results, executed months later — had grown to $7.0 billion by the time it actually redeemed, “owing to positive investment performance” in the interim. Man Group’s FY2024 results name the reason directly: “a strategic decision to switch their entire equities allocation to a passively managed portfolio” — not a verdict on Man Numeric’s process. The same filing states the mandate carried a net management fee margin of just 21 basis points, “driven by” that low-fee structure, and that it therefore had minimal impact on the firm’s profits. Systematic long-only AUM fell from $41.2bn (30 June 2024) to $37.1bn (30 September 2024) that same quarter — a $4.1bn net decline against a $7.0bn single redemption, meaning other flows or performance within the book that quarter must have partly offset it; Man Group’s disclosures don’t break that out further, so the precise offset isn’t verifiable from public data. For the full year, the category posted net outflows of $4.9 billion overall — one client’s decision moved the entire period’s category number from what would otherwise have been a modest net position to a clearly negative one.

2025 (inflow): The mirror image. Man Group’s FY2025 results reported systematic long-only net inflows of $22.5 billion for the year — and more than half of that, $13.2 billion, was a single client subscription. The category’s own net management fee margin fell from 27bps to 24bps in the same period; Man Group attributes the move to “large inflows at a lower margin” generally, and given the $13.2bn ticket alone accounted for 59% of the year’s net inflow, it is a reasonable inference — not a company-stated attribution to that one client specifically — that this subscription did most of the work. Either way, this is priced, commoditized, institutional-scale capital, not a diversified base of smaller subscriptions building organically.

Q1 2026 (outflow again): A $6.1 billion single-client redemption from “one of its long-only investment strategies” appeared in Man Group’s Q1 2026 trading statement — Man Group’s own disclosure does not name the client, and confirmed it “declined to comment” further. Separately, and in the same quarter, St James’s Place announced it was overhauling its £13 billion Global Equity fund, replacing its three managers — Los Angeles Capital Management, Man Numeric, and State Street Global Advisors, installed under a 2022 restructuring of the fund — with a single new adviser, Acadian Asset Management, specifically to cut the fund’s carbon intensity. Multiple outlets have reported the two events as connected, and the rough magnitude fits (SJP’s exit is described as “more than £4 billion,” which converts to roughly $5.3-5.7bn at prevailing rates — in the neighborhood of Man Group’s $6.1bn but not an exact match) — but no source directly confirms the link with an on-record attribution from either company. Treated here as the likely but not certified explanation. If accurate, it is, like the other two, not a performance judgment on Man Numeric — an ESG-positioning decision made on SJP’s own flagship retail product, in which Man Numeric was only one of three named managers.

Three periods, three single-client-sized swings, at most one tentatively identified client (and that one unconfirmed), three stated or inferred reasons (a shift to passive, an unnamed subscription, a carbon-intensity-driven adviser consolidation). None had anything to do with whether Man Numeric’s factor models were working.

Read more

EquiLibre Technologies’ $500M venture valuation prices its AI trading operation using software-scaling logic — but Grinold’s law, the 2007 quant unwind, and Renaissance’s own three-decade capacity discipline all show a trading edge scales in the opposite direction from a software product.

Three former DeepMind researchers spent the early 2020s teaching a computer to bluff. Martin Schmid, Rudolf Kadlec, and Matej Moravčík co-authored DeepStack, the first program to beat professional players at heads-up no-limit hold ‘em, while working out of DeepMind’s Edmonton office as visiting researchers. In 2022 they moved back to Prague and founded EquiLibre Technologies, betting that the reinforcement-learning techniques that solved poker would generalize to a domain with an even simpler reward signal: markets, where the score is just the account balance.

That bet just got priced at $500 million, roughly 3.6x the $140 million seed valuation EquiLibre carried nine months earlier. The round was led by Creandum, the European venture firm behind Spotify and Klarna, whose vice president Cameron Sellers confirmed to TechCrunch it was “the largest single investment the firm has ever made in one go into a company”. Neither Creandum nor EquiLibre has disclosed the actual dollar size of the check behind that superlative, or the round’s total size — only the resulting $500M valuation — so “largest investment ever” describes an undisclosed capital figure, not the valuation number driving this article’s argument, and the two should not be read as the same thing.

What’s actually being priced here is not a product. It’s an unaudited trading track record — and EquiLibre is not even the first AI-trading operation to get this exact treatment this year. Numerai, an AI-driven hedge-fund platform backed by Paul Tudor Jones, raised a $30 million Series C in November 2025 — eight months before EquiLibre’s round — at the identical $500 million valuation, after growing AUM from roughly $60 million to $550 million and posting a 25.45% net return in 2024, its strongest year. The difference is disclosure: Numerai’s return and AUM figures are stated and dated; EquiLibre’s “zero negative months” is not. Two AI-trading startups, the same $500M number, and very different amounts of the underlying evidence made public.

Tower Research Capital’s own website confirms that in late 2023 the three founders agreed to contribute their algorithms exclusively to the firm — republishing Bloomberg’s original May 2024 report on the arrangement — giving EquiLibre a live, revenue-generating book roughly two and a half years before its Series A closed. Tower Research is the New York proprietary trading firm Mark Gorton and Alistair Brown founded in 1998 that has historically traded only its own capital across equities, futures, and FX, with no outside-investor assets under its traditional structure to answer to about capacity — though that is now changing (more on this below). Through the arrangement, EquiLibre’s agents reportedly execute billions of dollars in daily volume across the S&P 500 and Nasdaq, and the company told TechCrunch it has a “perfect record of zero negative months since inception” — counting from a 2025 rollout on crypto markets that was later extended to equities. That figure is EquiLibre’s own characterization, relayed by a single outlet; no independent performance audit, return series, or Sharpe ratio has been made public, so treat “zero negative months” as a claim awaiting disclosure, not an audited result.

The pitch is a software pitch, and Sellers says so

Sellers didn’t describe EquiLibre as a fund with a good year. Explaining the size of the check to TechCrunch, he said “the potential total addressable market of trading in the financial markets is one of the biggest on earth, and there are countless funds over the years that have generated quantums of profit that make most venture-backed successes look small.” That is TAM language — the vocabulary of a venture capitalist pricing a company against the total size of a market it might capture a share of, the same framing used for a payments processor or a cloud database. And EquiLibre’s own leadership doesn’t resist the framing: Sellers said the company “explicitly defines itself as ‘a lab first, not a finance firm.’” Schmid, EquiLibre’s CEO, told TechCrunch the appeal of markets as a training ground is precisely their software-like measurability: “the nice thing about trading and markets is that the scoring is super simple: how much money did the agent make?”

That is the correct way to talk about a research lab that ships models. It is the wrong way to talk about the economics of the thing those models actually do once deployed, because the two objects obey opposite laws.

A software company’s central promise to a venture investor rests on a mechanism a16z’s D’Arcy Coolican and Li Jin describe plainly: “platforms and products with network effects get better as they get bigger — not just in value to users, but also in accruing more resources to improve their product.” More users make the product more valuable to the next user, and the marginal cost of serving one more of them is close to zero. That combination — increasing returns to scale, cratering marginal cost — is what allows a venture fund to underwrite a startup on the assumption that a big enough share of a big enough market compounds into a business worth far more than the sum of the capital poured in.

A trading strategy does not behave this way, and the reason is not folklore. It has a name.

Grinold’s law says the opposite thing

In 1989, Richard Grinold formalized what quantitative managers now call the fundamental law of active management — published as Grinold, R.C., “The Fundamental Law of Active Management,” Journal of Portfolio Management, Vol. 15, No. 3 (1989), pp. 30-37 (the original journal archive sits behind an institutional paywall; linked here to an openly-accessible explainer that reproduces the formula and derivation intact): a manager’s information ratio — the risk-adjusted value of their skill — equals their forecasting skill (the information coefficient, IC) multiplied by the square root of breadth, the number of independent bets they can make: IR = IC × √BR. The square root is the whole point. It is a diminishing-returns function, not an increasing one: doubling the number of independent forecasts a strategy makes does not double its edge, it multiplies the edge by roughly 1.41. A trading strategy’s value does not compound the way a network’s does — it grows sublinearly with more opportunities, and separately, it shrinks as more capital chases the same opportunities, because every added dollar has to transact in the same finite pool of liquidity.

That second mechanism — capital chasing a fixed opportunity set — is capacity decay, and it is the more binding constraint for a fast, liquid strategy like the kind Tower Research runs. A strategy that holds positions for minutes or hours, the way high-frequency and short-horizon statistical arbitrage books do, earns its edge from being early to a price correction. Deploy more capital into that same signal and each additional dollar’s trade moves the price further before it fills, which taxes every dollar that follows it — the strategy’s own execution erodes the mispricing it exists to capture. This is the mechanical reason a $10 million version of a strategy and a $10 billion version of the identical strategy do not earn the same return per dollar; frequently they cannot both exist.

Software has none of this friction. A cloud database serving its ten-millionth query does not degrade the answer to the first query. A trading algorithm executing its ten-millionth dollar absolutely can degrade the price available to the first dollar — and to every dollar deployed by every other fund running something similar. Two businesses, opposite arithmetic, and Creandum’s own language treated them as the same thing.

Capacity, in dollars, for the specific style Tower Research runs

Grinold’s law explains the shape of the problem. The size of it, for the trading style involved here, has actually been measured. Tower Research Capital’s core business — the firm EquiLibre’s algorithms trade through — has historically centered on high-frequency equity trading and market-making: providing liquidity and capturing small, fast price discrepancies at high turnover, the style of trading where capacity constraints bind hardest and fastest because the edge decays within minutes, not quarters. In 2010, computer scientists Michael Kearns, Alex Kulesza, and Yuriy Nevmyvaka published an empirical study that simulated an “omniscient” high-frequency trader — one who could see future prices perfectly — to establish the theoretical ceiling on what the most aggressive style of HFT could ever extract from the entire universe of U.S. equities. Their finding: even for this best-case, all-seeing trader, the maximum conceivable annual profit pool across all of U.S. equities in 2008 was on the order of $21.3 billion at the longest holding period they studied (a 10-second hold), collapsing to roughly $21 million at the shortest (a 10-millisecond hold) — a thousand-fold difference driven entirely by how much faster the edge deteriorates the more aggressively (and therefore more capacity-sensitively) it is captured.

(The same capacity-ceiling arithmetic shows up whenever a strategy gets big enough to matter — trend-following hit a hard ceiling near $4 billion once the SG Trend Index sat entirely above it, and D.E. Shaw, Citadel, and Renaissance’s statistical arbitrage books run into the identical mean-reversion-speed constraint. Capacity decay is not unique to AI trading — EquiLibre is just the newest entrant discovering it.) That figure is a ceiling for the entire U.S. HFT industry combined, not for one firm, and it is eighteen years stale against a market that has grown since — so it should be read as an order-of-magnitude anchor, not a live number. But the direction it points is unambiguous: “one of the biggest [markets] on earth,” Sellers’ framing for the TAM, describes the notional size of U.S. equity and derivatives trading — hundreds of trillions of dollars changing hands — while the extractable, capacity-adjusted profit pool available to a genuinely fast strategy is, per the best public academic estimate, several orders of magnitude smaller and shrinks further the faster the edge is captured. Notional market size and addressable trading-strategy profit are different numbers, and the TAM framing conflates them.

Tower Research’s own trajectory adds a real complication here, and it cuts both ways. Per Financial Times reporting relayed in industry coverage, Tower Research is planning to launch a fund open to outside investors for the first time — holding positions for hours or days rather than the sub-second horizons of its traditional book. The stated industry motivation is competitive: slower strategies are easier to raise LP capital against and simpler to report on. That is a different, more mundane explanation than “Tower’s fastest signals hit a capacity wall” — this article will not claim more certainty than the reporting supports. But the move is still telling in the direction this piece argues: a firm builds a slower, LP-facing product specifically because its fastest signals cannot absorb more capital without degrading, and a genuinely software-like, infinitely-scalable edge would have no obvious commercial reason to trade speed for size. It also means the clean “Tower has no LPs to answer to, so it doesn’t face Renaissance’s problem” framing is no longer fully accurate — Tower is walking toward exactly that problem, on its own timeline, for its own slower strategies.

Read more

Global hedge fund capital hit a record $5.6 trillion in Q2 2026 on the largest quarterly increase HFR has ever recorded — built in part on gross leverage near eight times NAV, concentrated in a handful of AI-chip names. And when that trade broke in mid-July, it was not a clean leverage unwind: at least four distinct triggers landed in the same window, and financing costs were only one of them.

The record, precisely

Global hedge fund industry capital rose to $5.6 trillion at the end of Q2 2026, up $409.3 billion in the quarter alone — the largest single-quarter increase HFR has recorded since it began tracking the industry, surpassing the previous record of $290.4 billion set in Q4 2020 by 41% ($409.3B / $290.4B = 1.41x) Hedgeweek: Hedge fund assets surge by record $409bn to $5.6tn in Q2. Of that increase, $364 billion was performance gains and $45.2 billion was net investor inflows — the two components round to $409.2B against HFR’s own stated $409.3B total, a $0.1B rounding artifact in HFR’s release, not a discrepancy this piece introduces — extending a run of 15 consecutive quarterly expansions Hedgeweek: Hedge fund assets surge by record $409bn to $5.6tn in Q2. HFR President Kenneth J. Heinz put it plainly: “The current environment is unequivocally the strongest for hedge fund capital growth since industry inception” Hedgeweek: Hedge fund assets surge by record $409bn to $5.6tn in Q2 — consistent with HFR’s own Q1 2026 commentary on the run-up to that record HFR: Investor Inflows Drive Global Hedge Fund Industry Capital To New Record.

The HFRI Fund Weighted Composite Index gained 7.5% in H1 2026, its strongest first half since 2021, led by equity hedge strategies (+9.6%, with the technology-focused sleeve specifically up 19%) Hedgeweek: Hedge fund assets surge by record $409bn to $5.6tn in Q2. Equity hedge assets alone grew $173 billion in Q2 to $1.76 trillion. This is the headline story, and it is real: by dollar magnitude, this is the fastest the industry has ever added capital in a single quarter. It is also a global, cross-strategy figure — event-driven, macro, relative value and fixed income all contributed alongside equity hedge — so nothing below should be read as claiming the entire $409.3B traces to one trade. It doesn’t. What follows is about the specific, disproportionately AI-chip-exposed slice of the industry that grew fastest and broke first.

Where AI-focused managers actually stand, and why the number keeps moving

Underneath the industry aggregate sits a smaller, faster story: a handful of pure-play AI managers posting “some of the fastest asset growth rates the industry has ever seen” Hedgeweek: AI-focused managers deliver fastest asset growth in hedge fund industry history. Situational Awareness — founded by former OpenAI researcher Leopold Aschenbrenner in late 2024, backed by Jane Street and the Collison brothers — grew to over $20 billion in assets in under two years, up roughly 270% year-to-date through May 2026 and more than 1,000% net of fees since inception, running on 8 employees at the start of 2026 Hedgeweek: Situational Awareness soars past $20bn; WithIntelligence: Focus on AI companies fuels fastest-growing hedge fund managers in industry’s history. One of its disclosed core positions is SK Hynix Hedgeweek: Situational Awareness soars past $20bn — the same South Korean memory-chip maker at the center of the July reversal below. To be clear about what that link does and doesn’t establish: no public reporting located for this piece shows Situational Awareness’s own July performance, and its disclosed portfolio has separately included semiconductor-sector put exposure — so its SK Hynix stake illustrates the broader theme’s positioning, not a confirmed casualty of the reversal specifically.

Value Aligned Research Advisors (VARA), a roughly 20-person Princeton firm, tells a parallel story: its long-only sleeve grew from $542 million at the end of 2024 to $5 billion by June 2026, and its long/short VAR AI Fund reached $15 billion, for $20 billion total — after gains of 113% in 2025 and 90% through April 2026 WithIntelligence: Focus on AI companies fuels fastest-growing hedge fund managers in industry’s history. What happens when AI-fund AUM outgrows its opportunity set is a story I’ve documented before — the last generation converged to index-like exposure at scale: AI Hedge Funds Now Run 0.99 Beta to the S&P. You’re Paying 2 and 20 for an Index Fund.

Here is the mechanism a Bloomberg terminal summary won’t flag: these funds’ own SEC-filed numbers do not agree with each other, let alone with the press. Situational Awareness’s Form ADV — the regulatory-AUM figure advisers are legally required to report — showed just $383 million, while the same fund’s own Q4 2025 Form 13F (covering long US equity positions as of December 31, 2025) separately disclosed $5.5 billion in long equity exposure alone Forbes: What One Former OpenAI Researcher’s SEC Filing Tells You About The Real AI Race — a roughly 14x gap between two SEC-filed figures for the same fund ($5.5B / $383M = 14.4x). Part of that specific gap is mechanical, not just timing: a 13F captures gross long exposure including leverage, not net regulatory AUM, so a highly-levered long book will show a 13F figure well above the ADV’s net number even measured on the same day. Press coverage separately put the fund at $20 billion just months later Hedgeweek: Situational Awareness soars past $20bn — a ~52x gap against the original $383M ADV figure. VARA’s SEC registration separately shows roughly $9.1 billion in regulatory assets FinTRX: Value Aligned Research Advisors, LLC firm profile, an undated aggregator snapshot; trade press had the firm at $20 billion within the same general window — again more than double (2.2x) WithIntelligence: Focus on AI companies fuels fastest-growing hedge fund managers in industry’s history.

This is not an accusation that any fund misreported anything — each figure is a real, dated SEC or press disclosure; they measure different scopes (net vs. gross, annual vs. quarterly) at different lags. The point is structural: for funds compounding assets at multiples-per-half-year, none of the disclosure mechanisms investors and journalists use to sanity-check manager-claimed AUM — not the annual ADV, not the lagged and gross-inclusive 13F, not press coverage — agree with each other closely enough to pin down a “current” number, and the gap ranges from roughly 2x (VARA) to an order of magnitude or more (Situational Awareness). The “fastest growth in history” is also, definitionally, the growth every available disclosure mechanism is structurally the least equipped to measure in real time.

The other side of the same balance sheet: leverage, not just capital

The $5.6 trillion HFR figure is net investor capital. It is not the industry’s actual market exposure. Two sources put hedge funds’ mean gross leverage ratio (total long, short and derivative exposure relative to NAV) at approximately 8x, up from roughly 5x about a decade ago: the Federal Reserve’s Financial Stability Report, via a report on its findings, and a separate S&P Global assessment published in early May 2026 Atlantic Council: As markets turn volatile, leverage is back in the spotlight; Resonanz Capital: Four Banks, Eight Times Leverage — What the S&P Warning Means for Hedge Fund Counterparty Risk. Neither link is the primary document itself — the Atlantic Council piece is commentary on the Fed’s report (the report itself is a large PDF this piece could not extract reliable text from directly), and the Resonanz piece is a boutique advisory note citing an S&P Global report that is not publicly linked and appears to be subscription-gated. Worth disclosing directly: the Resonanz piece’s own source list includes this same author’s prior published work as one of its inputs, alongside named third-party data providers — so while the specific 8x/68%/25% figures are attributed by Resonanz to those other named sources, not to that prior piece, the two “independent” corroborating chains for the leverage figure are not as fully arm’s-length as an “independently corroborated” framing would suggest. Treat the 8x figure as well-attested by trade coverage of both the Fed and S&P Global, not as two airtight independent primaries. That leverage growth (8/5 = 1.6x, a 60% rise in the ratio itself) is layered on top of the net-capital growth — meaning gross market exposure has been growing faster than the headline AUM number for roughly a decade, and the gap is widest right now.

That leverage is not diversified across the financing system. BNP Paribas, Barclays, Goldman Sachs and Morgan Stanley collectively account for roughly 68% of industry-wide prime brokerage revenue share, and their combined prime brokerage revenue rose approximately 25% over the past year as balances and margin lending expanded Resonanz Capital: Four Banks, Eight Times Leverage. (I mapped the revenue mechanics behind that concentration in How Prime Brokers Make $37B: Revenue Models Behind $6.2T Hedge Fund Leverage.) That is a separate statistic from — not the same banks as — the three institutions named below that specifically tightened AI-chip swap financing; only Goldman Sachs appears in both groups. The Fed’s own report separately notes hedge funds’ long US Treasury exposure hit a record $2.4 trillion — about 10% of all private-sector Treasury holdings — with $631 billion sitting in interest-rate swap-spread basis trades, a structure related to the swap positions that were unwound in April 2025 after that year’s tariff shock (the separate, comparatively stable cash-futures Treasury basis trade held up through that same episode) Atlantic Council: As markets turn volatile, leverage is back in the spotlight. Separately, margin debt reached $1.416 trillion in May 2026 (+53.7% year-over-year, 4.45% of GDP versus a historical median of 2.37%), with only three prior periods — late 1999–early 2000, mid-2007, and spring 2021 — showing comparable growth rates RealClearMarkets: Behind the AI Rally Lies a Dangerous Leverage Cycle. A full month before the named prime-broker tightening below, a 3x leveraged semiconductor ETF dropped 31% in a single session on June 5, 2026 RealClearMarkets: Behind the AI Rally Lies a Dangerous Leverage Cycle — an early sign that leverage in the sector was already fragile before any bank is reported to have acted.

The conflicting figure is the Fed’s Financial Stability Report citing total hedge fund AUM around $12.5 trillion Atlantic Council: As markets turn volatile, leverage is back in the spotlight — every leverage ratio in this piece is anchored to HFR’s $5.6T net-capital base; the $12.5T figure is flagged here, not used in any of this piece’s derived math.

Read more

The Technology/Media/Telecom hedge fund category carried a 0.99 beta to the S&P 500 in April 2026 — the highest of all 40 categories PivotalPath tracked, and tied with readings from February and March 2026 as among the highest in the firm’s 26-year dataset. In that same month, the average TMT fund came within 16 basis points of the S&P’s monthly return, the closest match ever recorded across those 40 categories. The 18-month rolling correlation to both the S&P and the Nasdaq is 0.96.

When the world’s most specialized tech equity managers collectively deliver S&P beta within rounding error, the 2-and-20 fee model requires a cleaner defense than “we pick stocks.” This piece argues that defense does not exist — not because these managers are poor at stock selection, but because capacity overflow has removed the portfolio space in which their selection could produce returns uncorrelated to index performance. The practical implication is direct: an allocator paying 2-and-20 to a TMT hedge fund above roughly $10 billion in AUM is, in most cases, paying premium fees for Nasdaq beta rather than for alpha. The mechanism, the alpha decay, and the approximate capacity bound at which the remaining edge survives are all documentable.

🎬 Prefer to watch rather than read? A NotebookLM-generated video overview of this article is available here: Watch the video overview → Full analysis, citations, and data remain in the article below.

Note on PivotalPath data used throughout: PivotalPath’s own publications state that the firm tracks over 3,000 institutionally-relevant hedge funds spanning more than $3 trillion in global hedge fund capital. Their indices over-represent larger, established funds relative to the full industry.

The Beta Arithmetic

PivotalPath, as reported in Institutional Investor (May 27, 2026), found the TMT Index’s 18-month rolling beta to the S&P 500 at 0.99, with correlation to both the S&P and the Nasdaq at 0.96. The historical baseline makes the shift legible: from 2000 through late 2024, the average TMT beta to the S&P 500 was 0.40 and, on a rolling basis, never exceeded 0.50 except during the 2008 financial crisis. Jon Caplis, CEO of PivotalPath: “at the end of 2024 when technology funds steadily went from roughly .5 to close to 1 right now.”

The implied Nasdaq beta requires one derivation step. Given TMT correlation to Nasdaq of 0.96 and the reported beta to the S&P of 0.99, the implied TMT volatility relative to the S&P is:

σ_TMT / σ_S&P = β_S&P / ρ(TMT, S&P) = 0.99 / 0.96 = 1.031

Nasdaq Global Indexes’ Q4 2025 research paper (data through December 31, 2025, 18-year period) reports Nasdaq-100 annualized volatility of 22.9% and S&P 500 annualized volatility of 20.1% — a ratio of 1.139. Applying this:

β_Nasdaq = ρ(TMT, Nasdaq) × (σ_TMT / σ_Nasdaq) = 0.96 × (1.031 / 1.139) ≈ 0.87

Important sensitivity note — and why it only runs one direction. The 18-year long-run vol ratio (1.139) is the only verified, publicly available figure; the 18-month period over which PivotalPath measured TMT correlation and beta does not have a published realized vol breakdown. In the AI rally regime — particularly 2024, when the Nasdaq returned 25.9% versus the S&P’s 25.0% — Nasdaq and S&P co-moved more tightly than their historical average, likely compressing the recent-period vol ratio. If the current-regime ratio is approximately 1.05 rather than 1.139, then β_Nasdaq ≈ 0.94, not 0.87. The sensitivity runs in only one direction: a compressed recent-period vol ratio implies a higher Nasdaq beta, which makes gross alpha more negative, not less. The table below uses 0.87 as the conservative floor; if 0.94 is closer to the truth, Coatue’s 2024 gross alpha is −5.6pp rather than −3.8pp.

The composite correlation data extends well beyond tech specialists. PivotalPath’s October 2025 market risk alert, as reported by Axios, found the 12-month composite hedge fund correlation to the S&P at 0.955 — the 99th percentile of historical readings. Multi-strategy funds show 0.819 correlation to the S&P, at the 98th percentile. Event-driven funds, per Crain Currency/Pensions & Investments, reached 0.99, against a historical mean of 0.79.

The Mechanism: Position Scale Removes the Alpha Surface

The failure mode is structural. A TMT fund managing $59 billion in discretionary AUM (Coatue’s Form ADV filed March 2024, as reported by Insider Monkey) constructing a 40-name long book at 2.5% average weight requires approximately $1.5 billion per position. That size is viable only in companies with market capitalizations well above $100 billion — which is to say, the Nasdaq 100’s largest names. The “tech selection” alpha Coatue’s analysts can generate on mid-cap names cannot be expressed at meaningful portfolio weight at $59B AUM. The long book is anchored in the same mega-cap AI names that define the index.

A second mechanism amplifies the first: diversification across managers does not escape the problem at the portfolio level. PivotalPath’s credit index runs 0.94 correlation to the S&P 500 over the prior 12 months, while average individual credit managers show approximately half the index-level reading. The AI factor is present in each manager’s book at a moderate level; when an allocator combines multiple managers seeking diversification, the shared AI exposure reappears in aggregate. Diversification across correlated managers reconstructs the benchmark.

The 1998 Mirror: This Has Happened Before

Brunnermeier and Nagel’s 2004 academic paper, examining 53 hedge fund managers’ quarterly SEC 13F filings from 1998 to 2000, found systematic technology overweighting throughout the Nasdaq’s ascent. [13F filings capture long US equity positions at quarter-end only; they do not capture short positions, derivatives, or international holdings. The directional overweighting finding is treated as valid for the long book.] At the Nasdaq’s March 2000 peak, the sample held 31% of stock portfolios in technology against a market weight of 21%. The funds were not hedging the bubble — and their long books did not protect against the 55% Nasdaq 100 drawdown that followed.

The current exposure structure is directionally comparable. The Goldman Sachs equity strategy team, per Institutional Investor’s reporting, found that top tech stocks accounted for 53% of S&P 500 total returns in 2024. Goldman Sachs prime brokerage data, reported by Reuters and confirmed by Hedgeweek, showed hedge funds’ exposure to AI-related tech hardware at its highest since Goldman began tracking the data in 2016, as of October 2025. (Goldman prime brokerage data covers Goldman’s client universe, not the full industry.)

The 1998 parallel is not a prediction of a comparable drawdown. It is a structural analogy: both episodes show a concentrated equity market reducing the diversification surface for any discretionary long manager — and a hedge fund industry that, individually rationally, declined to run tracking error against the dominant factor.

The Coatue Arithmetic: A Case Study in Fee-Loaded Beta Negative

Institutional Investor’s 24th Annual Rich List — which ranked managers by personal 2024 earnings: Englander ($4B), Griffin ($3.3B), Cohen ($3.2B), then Laffont ($1.9B) at fourth — reported that Philippe Laffont’s Coatue Management gained 18.7% in its main long-short fund in 2024. The Nasdaq 100 returned 25.88% that year per Invesco, the index licensor.

Applying the conservative β_Nasdaq floor of 0.87:

‡ Source: Institutional Investor Rich List for 2024; Crain Currency/P&I for both 2025 YTD figures. Coatue returns are Institutional Investor’s attribution, not audited results from Coatue.

§ Source: Invesco QQQ Quarterly Outlook.

† Model estimate: 2% management fee + 20% × gross return under standard 2-and-20 structure. Actual fees vary: funds with a high-water mark above current NAV pay no performance fee in years where NAV remains below that mark. In a recovery year following a drawdown, the effective fee load can be significantly lower than this model shows. The model reflects the steady-state fee drag, not a post-drawdown scenario.

In 2024, Coatue’s gross return was 3.8pp below its own beta expectation at the 0.87× floor — 5.6pp below if the compressed vol ratio is closer to the true regime figure. After the estimated fee load, investors received roughly 13% while QQQ returned 25.88%. Coatue placed fourth among the industry’s highest earners in 2024. The managers ranked below it, charging comparable fees on comparable beta, produce worse relative outcomes by construction.

The complete Nasdaq beta derivation (with sensitivity analysis at both the 0.87 and 0.94 endpoints), the full Coatue fee decomposition table, and the three-band diagnostic for evaluating any TMT allocation are in the Patreon research note. The note covers the mechanism from first principles, including the capacity bound analysis and the one-calculation test for whether your specific fund has already crossed the threshold at which 2-and-20 is indefensible.

The Decay Curve: From 7.1pp to Negative

Pensions & Investments (February 24, 2020; subscription required, figures confirmed via search index) reported PivotalPath data showing the TMT index generated annualized alpha of 7.1 percentage points relative to the S&P 500 over the 10 years through December 31, 2019 — when PivotalPath tracked approximately $45 billion in TMT hedge fund assets across 85 managers. Caplis noted that capacity constraints mean “large institutional investors tend not to invest. They generally just can’t put enough money to work to move the needle.”

Coatue’s $59 billion in discretionary AUM — from its Form ADV filed March 2024 — is approximately 31% larger than the entire 2020 TMT universe PivotalPath tracked. The category alpha has declined from 7.1pp (10-year annualized through 2019) to 4.2pp (18-month trailing, per Institutional Investor, May 2026), against a historical median of 5.2pp.

Methodological note on the comparison: the 7.1pp is a 10-year annualized average and the 4.2pp is an 18-month trailing reading — structurally different windows. The like-for-like comparison is against the 5.2pp historical median, against which the current 4.2pp represents a 1.0pp shortfall. The full decline from 7.1pp to 4.2pp encompasses both the AI concentration event and the base-rate difference between a long-run peak and a current-period trailing measure.

The AUM decomposition — what is documented and what is inferred. The critical structural claim of this article is that the 4.2pp category average is distributed unevenly across fund sizes: large-AUM funds generate negative gross alpha while the category average is held up by smaller, more nimble managers. The industry-level evidence for this claim is documented: PivotalPath data reported by Business Insider (December 28, 2025) shows funds managing less than $500 million outperformed larger peers through November 2025, with sub-$100M funds returning 14.6%. Caplis is explicit on mechanism: “Their size gives them greater flexibility about the stocks they wager on and in what size.” The same report notes that in 2024, the dynamic was reversed — large funds led. The TMT-specific AUM-band decomposition of the 4.2pp figure is not publicly available from PivotalPath’s published data; the claim that large-AUM TMT funds are dragging below the category average is a structural inference from the position-sizing mechanics and the industry-wide AUM return patterns, not a directly documented decomposition. Readers who want to stress-test this specific claim should request PivotalPath’s AUM-band analysis for the TMT category directly.

Approximate capacity bound (analytical inference, not directly cited from any source): position-sizing mechanics imply mid-cap idiosyncratic alpha is accessible at fund sizes below approximately $2–3B, where a 2.5% position weight represents $50–75M and is viable in companies with $1–5B market caps. PivotalPath’s March 2024 data showed mid-sized managers ($1–2.5B) outperforming other AUM bands across all strategies in the TMT-heavy February 2024 period — one data point, covering all strategies, not a systematic TMT study.

The Strongest Counterargument

PivotalPath’s own data shows 4.2pp annualized gross alpha over the 18 months through April 2026. Caplis is explicit: “technology funds are generating alpha, or returns above what the market itself would deliver.”

Three responses. First, the alpha is declining on a trajectory consistent with capacity crowding: 7.1pp (10-year avg through 2019) → 5.2pp (historical median) → 4.2pp (current), with the force driving that decline still operating. Second, at 2-and-20 with 4.2pp gross alpha, the performance fee consumes 0.84pp and the management fee 2.0pp — net alpha to investor ≈ 1.4pp, insufficient to compensate for lockup, drawdown asymmetry, and the tail risk Caplis himself named: “If the S&P is off 20 percent, these guys are going to be down huge.” Third, as the AUM decomposition section above acknowledges, the precise allocation of the 4.2pp across AUM tiers is not publicly documented at the TMT-category level. What is documented is that at the $59B scale, Coatue’s gross alpha was negative against beta expectations in both examined periods.

What Would Reverse This

Breadth recovery: if the equal-weight S&P 500 begins systematically closing the gap with the cap-weighted index, the mega-cap positioning constraint on large TMT long books relaxes. This gap is currently at a multi-decade extreme: the three-year cap-weight outperformance over equal-weight is the widest since 1971, per Motley Fool citing S&P data, corroborated by RBC Wealth Management’s January 2026 analysis (32% three-year gap, exceeding the 31% peak of the late 1990s). On a trailing 12-month basis, equal-weight lagged by 9% through April 2026, per S&P Dow Jones Indices.

Factor regime shift: a sustained period in which value spreads, quality-over-growth, or macro factors dominate returns would displace the AI beta mechanism. PivotalPath identifies managed futures, global macro, and systematic equity quant as the strategies that currently maintain meaningful diversification and that underperformed most in 2025’s equity rally before recovering.

The thesis is falsifiable: it would be disproven if PivotalPath’s TMT beta to the S&P 500 returned durably below 0.6 and category-average gross alpha recovered above 6pp. Neither condition obtains while Mag-7 names account for a dominant share of equity index returns and TMT fund AUM stays concentrated in the funds forced to hold those same names.

The one-calculation diagnostic, its three-band threshold framework (above 5pp / 2–5pp / below 2pp), and the full capacity bound analysis are in the Patreon research note.

The Actionable Implication and Its Capacity Bound

For TMT or AI-focused hedge fund allocations at funds above approximately $10 billion: the correct revaluation question is not “what alpha can this manager generate in theory” but “what is the net-of-fee cost of the beta being delivered?” At 0.87× Nasdaq beta (conservative floor) and approximately 5–6% annual estimated fee drag in a positive return year, a 70/30 QQQ/short-duration Treasury allocation delivers comparable factor exposure at 18 basis points. The ~1.4pp net alpha residual in the category average does not compensate for lockup and the asymmetric downside.

For allocators who can write $50–150M checks into sub-$2B TMT managers: the residual alpha is real where the position-sizing constraint does not bind, and PivotalPath data confirms that smaller funds maintained higher returns through 2025. The caveat is structural access — Caplis identified in 2020 that “large institutional investors tend not to invest” in this segment because minimum ticket sizes relative to fund capacity make meaningful allocation impossible.

The diagnostic test for any existing TMT allocation: compute (fund’s 18-month gross return) − (0.87 × R_Nasdaq over the same period). If the difference is below 5pp annualized, the manager has passed the capacity threshold at which 2-and-20 is defensible. Below 2pp, the structure is extracting more value than it creates. The 4.2pp category average is in the amber zone, declining, and likely weighted upward by smaller managers that most large allocators cannot access at scale.

📊 Want Deeper Quantitative Analysis?

This research took a very long time of data collection, verification, and analysis. If you found value in this deep-dive, I publish exclusive quantitative research, trading strategies, and institutional-grade analysis on Patreon.

By joining, you’ll be supporting my work and motivating me to publish more content like this.

→ Join the Patreon community here

Connect with The Mathematical Trader:

📺 Subscribe on YouTube — video breakdowns of quantitative finance and institutional strategies

💼 Follow on LinkedIn — research updates and institutional finance commentary

Primary sources, all fetched and verified: PivotalPath via Institutional Investor, May 27, 2026 · PivotalPath via Axios, October 30, 2025 · PivotalPath 10-Year Press Release, November 2023 · Nasdaq Global Indexes — NDX vs. SPX Q4 2025 · Invesco QQQ Quarterly Outlook · Institutional Investor 24th Annual Rich List · Crain Currency/P&I, October 15, 2025 · Pensions & Investments, February 24, 2020 (subscription) · Business Insider / PivotalPath small-fund data, December 28, 2025 · Brunnermeier & Nagel, Princeton, 2004 · PivotalPath PPOV March 2024 · Reuters/Hedgeweek on Goldman AI tech hardware, October 2025 · Coatue Form ADV via SEC IAPD · Motley Fool — S&P 500 equal-weight gap, January 2026 · RBC Wealth Management — The Great Narrowing, January 2026 · S&P Dow Jones Indices Equal Weight Sector Dashboard, April 2026

Cover photograph: Nielsoncaetanosalmeron, CC BY 4.0, via Wikimedia Commons.

Morgan Stanley’s $17.9 billion Q4 2025 was not an outlier. It was the inevitable output of a machine that hedge funds and banks have spent years constructing together — one where every fee line on a bank’s income statement is the cost-of-capital line on a fund’s trade sheet. Here is exactly how that machine worked, mechanism by mechanism.

The Numbers Wall Street Reports vs. the Numbers That Matter

On January 15, 2026, Morgan Stanley posted Q4 2025 results that beat every analyst estimate. EPS came in at $2.68 against a $2.41 consensus, with the bottom line up 21% year-over-year. Investment banking fees surged 47% to $2.41 billion; advisory fees soared 45%; fixed income underwriting jumped 93%; equity underwriting grew 9%. Equity trading revenues climbed 10% to $3.7 billion.

The consensus read is straightforward: strong macro, recovering M&A, hot IPO market. That read is incomplete. The analytically richer question is what had to happen inside the world’s trading rooms for those line items to print the way they did. The answer, on almost every revenue line, is hedge funds. Prime brokerage leverage, merger arbitrage spread capture, IPO allocation mechanics, and derivatives flow are the actual gears. Morgan Stanley’s income statement is what happens when all four run simultaneously at near-peak throughput.

Each mechanism is individually significant. Viewed together, they are a single closed system — and understanding that system requires working through each gear in sequence.

I. Prime Brokerage: Record Leverage, Record Fees

Prime brokerage converts hedge fund balance sheets into bank revenue. Every dollar of leverage a long/short fund deploys against an equity position lives on the prime desk’s book. The bank earns a financing spread on that position for as long as the fund holds it. When funds run larger gross books at higher leverage ratios, bank prime revenue rises in direct proportion — there is no ambiguity in the transmission mechanism.

In 2025, that leverage was at near-all-time highs. Data compiled by Goldman Sachs, JPMorgan, and Morgan Stanley showed that leverage used by traditional long/short equity hedge funds continued rising throughout the year, approaching records. The consequence was predictable.

Morgan Stanley CFO Sharon Yeshaya explained it directly on the Q4 2025 earnings call: “Prime brokerage revenues drove the fourth quarter’s results. Client balances continue to rise, supporting the outlook for financing revenues.” — Q4 2025 Earnings Call Transcript

She had said almost the same thing in Q3 2025, when equities revenues hit $4.1 billion: “Prime brokerage revenues drove results as average client balances and financing revenues reached new records.” The language was not incidental; it was the structural explanation for the number.

CEO Ted Pick framed the systemic link directly in Q3: “We’re at 6,700 S&P and index asset price highs around the world. If there is a deleveraging event or a recession scare and the markets are lower, well, by definition, the financing revenues will be lower. I mean, they are linked in that sense, as you know, inextricably.” — Q3 2025 Earnings Call Transcript

The environment that enabled that leverage is the key variable. JPMorgan’s head of global equities, Rachid Alaoui, described it precisely in a Reuters interview: “We had a favorable trading environment, with a lot of rotation and trading activity but without extreme volatility. That allowed clients to add some leverage in prime without any credit or counterparty issues.” No counterparty stress meant no forced deleveraging. Funds held elevated gross exposure through the full year, compounding both their own returns and banks’ financing revenues.

The industry-level numbers frame the scale. Coalition Greenwich projects prime brokerage revenues at a record $32.7 billion in 2025 among top-tier prime brokers, an 18% increase over the prior year — consistent with a broader Finadium estimate of $37 billion when mid-tier providers are included, also up 18% and 23% higher than prior estimates focused only on top prime brokers. Both measures point to the same structural conclusion: a new high-water mark, whichever scope you apply. All of this sits within a total equities trading revenue pool projected at $94 billion — a 17% increase from 2024, surpassing the previous record of $85 billion set in 2007. Mollie Devine, head of markets competitor analytics at Coalition Greenwich, put it in one line: “Everything worked in equities this year: there were substantial upticks in cash, in derivatives, in prime.” — IFR

Cross-bank confirmation came from the same earnings cycle. JPMorgan reported a 40% surge in equities revenues to $2.9 billion, driven by prime; Bank of America saw a 23% jump in Q4 equities revenues; Citigroup reported prime balances up more than 50% year-over-year. Goldman CFO Denis Coleman explained why the business is structurally valuable, not merely cyclical, on Goldman’s Q3 2025 earnings call: “Balances are very, very correlated with overall levels in the markets. That is an attractive feature of the business. It has been, together with FICC financing, a good source of stable revenues for us across the franchise.”

Morgan Stanley specifically increased its share of the equities trading revenue pool by approximately 170 basis points over the trailing twelve months — a standout run, per IFR and Coalition Greenwich, that positioned it among the very top equities franchises globally.

That prime brokerage leadership had a structural ceiling, however — one that the firm had been quietly dismantling for two years. The ceiling was the derivatives gap.

II. The Derivatives Gap Closes — Yeshaya’s Most Important Disclosure

The single most analytically significant statement in Morgan Stanley’s Q4 call was buried in a competitive positioning answer. CFO Yeshaya told analysts:

“The growth of the derivatives business — a relative weakness of Morgan Stanley relative to the top-tier competitors — a lot of that has now been erased. So we actually are coming across now as a derivatives house as well for clients.” — Q4 2025 Earnings Call Transcript

The size of the prize that statement describes: global equity derivatives revenues across banks rose 19% in 2025 to $34.7 billion, a record, driven by single-stock volatility around technology names that facilitated substantial client flow across every desk. Every basis point of that market Morgan Stanley had previously ceded to Goldman or JPMorgan was a revenue gap. Closing it means internalizing that flow rather than watching it route elsewhere.

This was the payoff of a multi-year strategic campaign. CEO Pick had described the objective in Q2 2025 using the “old nine boxes” framework — prime brokerage, derivatives, and cash across three regions — noting that Morgan Stanley had been closing gaps with Goldman and JPMorgan across all nine simultaneously. By Q3, he was direct: “The development of our derivatives business, liquid derivatives and the cash business — once thought to be one that would be totally subordinate to prime — is now thriving.”

Why does this matter for hedge funds specifically? Derivatives are the primary instrument through which event-driven and macro funds express leveraged, asymmetric views: options on M&A target stocks, convertible bonds as pre-IPO expression vehicles, variance swaps as dispersion plays on earnings events. When Morgan Stanley closes the derivatives gap, flow that previously routed to Goldman or JPMorgan — and the bid-ask spreads and structured product margins on every trade — increasingly stays at Morgan Stanley. Every bookrunner mandate, every arb desk relationship, every prime client is now also a potential derivatives counterparty for the same bank that runs their book.

Those derivatives clients are not abstract. The single largest generator of hedge fund derivatives flow in 2025 was merger arbitrage — and the deal environment that year was extraordinary by any historical measure.

III. Merger Arbitrage: The Trade Anatomy Behind the 47% IB Fee Surge

Morgan Stanley’s 47% investment banking fee surge was manufactured by a specific deal environment — and that same environment handed event-driven funds their best systematic setup in years.

The professional framework was documented by Scott Schefrin, Portfolio Manager of AllianceBernstein’s Systematic Merger Arbitrage strategy. Schefrin has run risk arb books since 1993 and was previously global head of risk arbitrage, event-driven, and capital structure arbitrage at Bear Stearns, managing a $2.5 billion proprietary portfolio with over 35 professionals. In a December 2025 publication, Schefrin set out the year’s three-part structure:

First, a more predictable regulatory backdrop led to stronger deal flow, faster completions, and fewer deal breaks — the primary risk merger arbitrageurs underwrite. Compared to the long-run average, remarkably few deals collapsed, reducing what is often a sizable drag on merger-arbitrage performance. Second, the April tariff-driven equity sell-off created a buying opportunity for arb investors who rode a second wave of spread-tightening into July. Third, deal volume itself exploded: by Q3 2025, the number of US deals worth more than $5 billion had risen approximately 166% compared to the same period in 2024. The HFRI Event Driven Merger Arbitrage Index was up 8.2% through Q3 — the strongest first three quarters since 2021 and the second-best since 2009.

The Electronic Arts deal — the textbook case. On September 29, 2025, Electronic Arts announced it would be acquired by a consortium led by Saudi Arabia’s Public Investment Fund, Silver Lake, and Affinity Partners for $55 billion — the largest take-private transaction in history. EA stockholders would receive $210 per share in cash, a 25% premium to EA’s unaffected share price of $168.32 at market close on September 25. The transaction was funded by $36 billion in equity from the consortium and $20 billion of debt financing fully committed by JPMorgan Chase Bank.

The arb mechanics were structurally optimal. This was a pure all-cash offer — no stock-for-stock basis risk, no exchange ratio to hedge. Arbitrageurs simply bought EA shares below $210 and collected carry until close. JPMorgan’s committed debt financing eliminated financing conditionality risk — one of the two primary risks arb funds underwrite. The $1 billion termination fee payable by the consortium on a regulatory or deal failure gave arb books a contractual floor on downside. EA shareholders voted to approve the deal in December 2025, with close expected in Q1 FY27, keeping arb capital deployed and earning carry through the completion cycle.

Morgan Stanley did not advise on the EA deal — Goldman Sachs was EA’s banker. But that distinction is structurally irrelevant to the thesis. The explosion of the deal environment that generated the EA trade, the Union Pacific–Norfolk Southern merger (cited by AllianceBernstein as the largest M&A deal in five years), and the 166% surge in $5 billion-plus US deals is precisely what drove Morgan Stanley’s 47% IB fee increase and 45% advisory fee surge. The same regulatory environment and deal wave that gave arb funds their best setup in years gave Morgan Stanley its best banking year in years. They are fed by the same source.

Schefrin noted in the 2026 outlook that headwinds may emerge from spread compression as more arbitrage capital is deployed to exploit the favorable environment — itself a confirmation that returns were high enough to attract substantial new inflows. That capital is now looking for the next allocation vehicle. In 2025, one of the most crowded ones was the IPO queue.

📋 Patreon Exclusive — The Full Trade Reference: If you want the complete, source-tagged trade anatomy of every position covered in this article — the EA arb entry windows, the correct and incorrect executions, what was confirmed vs. inferred, and the checklist that made EA the cleanest arb of the cycle — I’ve published it as a structured reference document for Patreon subscribers. Built for re-reading before future similar setups. → Read the 2025 Trade Reference here

IV. IPO Allocations: The Mechanism Finance Doesn’t Discuss Publicly

The same deal-origination machine that drove the 47% IB fee surge also determined who captured the first-day gain on every IPO the bank ran as joint bookrunner. Every bookrunner mandate is simultaneously a revenue event for the bank and an allocation decision for the funds inside its prime brokerage network. These are not independent variables.

Research published in the Journal of Portfolio Management documents the pattern precisely: investment banks that have prime brokerage relationships with hedge funds tend to allocate more IPO shares to those funds when serving as lead underwriters. The logic is transactional. Prime brokerage clients generate recurring, high-margin fee income for the bank. Bookrunners direct allocations toward the clients that maximize the total relationship economics, not just the IPO economics.

The Figma IPO on July 31, 2025, was the most extreme materialization of this dynamic in the cycle. Morgan Stanley, Goldman Sachs, JPMorgan, and Allen & Company were joint lead bookrunners. The offering was approaching 40 times oversubscribed. Figma’s stock surged approximately 250% on its first trading day, closing at $115.50 from an IPO price of $33 — one of the largest single-day IPO pops in decades. Analysis estimated that the company left more than $3 billion of primary proceeds on the table, with that value gap captured immediately by allocated institutional investors.

The mechanism that transfers that value is IPO allocation — which flows preferentially toward the same hedge funds paying prime brokerage fees to the banks running the book. The bank captures underwriting fees, advisory fees, and prime revenues on the same client relationship. The fund captures the IPO pop. CFO Yeshaya noted in the Q4 call that equity underwriting results were driven by convertibles and IPOs, contributing to 9% year-over-year growth in equity underwriting income. Each of those bookrunner mandates is simultaneously a fee event for the bank and an allocation event for its prime network.

This bundling — prime financing, M&A advisory, IPO bookrunning, and derivatives desk all serving the same institutional client — is not accidental. It is the architecture that CEO Ted Pick has spent two years deliberately constructing.

V. The Integrated Investment Bank: How Morgan Stanley Built the Loop

CEO Ted Pick and head of Institutional Securities Dan Nassetta have spent two years constructing what Morgan Stanley calls the “Integrated Investment Bank” — explicitly designed to maximize wallet share by bundling M&A advisory, derivatives, prime brokerage, and fixed income financing into a single institutional relationship. The thesis: a hedge fund that brings all its business to Morgan Stanley generates more total fee revenue per dollar of balance sheet than four separate relationships at four separate banks.

On the Q4 call, Pick described the capital deployment framework: “M&A acquisition financing, prime brokerage, fixed income secured lending, and other durable businesses that accrete to the broader integrated firm.” On the IPO pipeline: “We have very large private companies that are wildly successful that are probably going to start bridging to going public.” — Q4 2025 Earnings Call Transcript

The efficiency metric that validates the model: revenue growth in Institutional Securities was running approximately two times SLR and RWA growth since 2023 — demonstrating capital-efficient wallet share expansion. More fees per dollar of regulatory capital deployed is the signature of the integrated bundle working. The firm gained 100 basis points of wallet share with clients across investment banking and markets in 2025, confirming that clients are concentrating their flow — and their fees — at Morgan Stanley rather than spreading it.

The funds concentrating that flow are not abstractions. They are named institutions — and in 2025, their returns reflected precisely the machine this article has been describing.

VI. Hedge Fund Returns 2025: The Scoreboard

The funds on the other side of these transactions had their strongest year since the post-pandemic boom. D.E. Shaw’s Oculus Fund returned 28.2% net for 2025; its flagship Composite Fund returned 18.5%. Bridgewater’s Pure Alpha surged 34%, marking the firm’s highest profits in its 50-year history. Balyasny delivered 16.7%; Point72 returned 17.5%; AQR’s Apex Strategy gained 19.6%; ExodusPoint returned 18%, its best year on record; Millennium gained 10.5%; Citadel’s Wellington posted 10.2%. Michel Massoud’s event-driven Melqart Opportunities Fund surged 45%.

The breadth of strong performance across strategies — multi-strat, macro, event-driven, and quant — is the tell. This was not alpha generated in one pocket by one approach. It was a macro environment that simultaneously rewarded leverage (low volatility, rising markets), event positioning (record deal flow, few breaks), and IPO allocation (massive first-day pops). According to Goldman Sachs’ prime brokerage unit, stock-picking funds posted returns of 16.24% in 2025, roughly matching the S&P 500’s 16.4% — but at fundamentally different leverage profiles, amplifying nominal dollar returns on a larger gross book.

Vanessa Bogaardt, global head of capital introduction and prime financing at Bank of America, framed the year from the prime desk’s vantage point: “Overall, it has been a strong year for hedge funds across strategies, with decent alpha generation and recognition from allocators.” — Reuters

The returns range — 10.2% at the lower end to 45% at the top — maps almost exactly onto the degree of engagement each fund had with the mechanisms this article has described. Melqart’s 45% came from concentrated event-driven positioning in the same deal environment that gave Morgan Stanley its 47% IB fee surge. The multi-strats at 10%–17% were the large-book, high-leverage prime brokerage clients generating the financing revenues that drove every prime desk’s record year. The machine’s output on both sides of the ledger is consistent, coherent, and not coincidental.

The Closed Loop

Viewed individually, each mechanism — prime brokerage leverage, merger arb spread capture, IPO allocations, derivatives flow, the integrated client bundle — looks like a separate strategy or a separate business line. Viewed together, they form a single closed system with Morgan Stanley at the center, operating the same logic at every node.

Morgan Stanley originates M&A deals and earns advisory fees. Hedge funds run arb books on those deals using leverage financed by Morgan Stanley’s prime desk. Morgan Stanley serves as joint bookrunner on IPOs and allocates stock to its prime clients. Hedge funds trade derivatives on all of those equity events through Morgan Stanley’s desks. And because Morgan Stanley has now closed the derivatives gap with Goldman and JPMorgan — per Yeshaya’s own disclosure — the flow that once leaked to competitors increasingly routes back home.

This is the machine the opening described: every fee line on Morgan Stanley’s income statement is the cost-of-capital line on a fund’s trade sheet. That is not a metaphor. The prime desk charges the spread that the arb fund pays to lever its EA position. The IPO desk earns the underwriting fee that the allocated hedge fund offsets against its first-day pop. The derivatives desk captures the margin on the variance swap that the macro fund uses to express its view. The same dollar that moves through a fund’s P&L as a return moves through the bank’s P&L as a fee. They are the same transaction, told from opposite ends of the same ledger — and in 2025, both sides printed records simultaneously.

The question for 2026 is how much of that is cycle and how much is structure. The integrated investment bank model, the derivatives build-out, the prime brokerage market share gains — those are structural. The regulatory tailwind that drove the 166% surge in large M&A deals, the low-volatility environment that let funds hold peak leverage without forced deleveraging — those are cyclical. The machine will keep running. The only variable left to solve for is what fuel the environment provides — and that question, unlike the machine itself, is genuinely open.

📊 Want Deeper Quantitative Analysis?

This article covers the mechanism. The Patreon post covers the trades.

→ 2025 Trade Reference: The Closed Loop — Every Position, Every Entry, Confirmed vs. Inferred

The exclusive Patreon post goes trade by trade through every position this article describes — the EA arb entry windows and risk structure, the Figma allocation mechanics, the leveraged long/short conditions, the systematic merger arb portfolio construction — with full transparency on what is sourced to primary documents and what is logically inferred. Built as a reference document you can return to before future similar setups.

This research took significant time in data collection, verification, and cross-source analysis. For more institutional-grade deep-dives, trading strategy breakdowns, and quantitative research published at this level of rigour:

→ Join the Patreon community here

Sources: Morgan Stanley Q4 2025 Earnings Call Transcript — Insider Monkey · Morgan Stanley Q3 2025 Earnings Call — Investing.com · Morgan Stanley Q2 2025 Earnings Call — Motley Fool · Q4 Earnings Beat Summary — Nasdaq/Zacks · Strong Year for Hedge Funds / Prime Brokerage — Reuters · Strong Year for Hedge Funds — US News · Goldman Sachs Q3 2025 Earnings Call — Investing.com · Coalition Greenwich Equities Record + Derivatives $34.7B — IFR · Prime Brokerage Revenues $37B — Finadium · AllianceBernstein Merger Arbitrage 2026 Outlook · Schefrin Bio — AdvisorAnalyst · EA $55B Take-Private — EA IR · EA Shareholders Approve Deal — Esports Advocate · Figma IPO 40x Oversubscribed — Bloomberg · Figma First-Day Close — Bloomberg · Figma $3B+ Left on Table — Augment Market · Hedge Funds & Prime Broker IPO Allocations — Journal of Portfolio Management · Top Hedge Fund Returns 2025 — Reuters · Top Hedge Fund Returns 2025 — Hedgeweek · Top Hedge Fund Returns — Fortune · Merger Arbitrage 2026 — Seeking Alpha

About the Author

Navnoor Bawa researches quantitative trading strategies, institutional market structure, and hedge fund mechanics. He publishes institutional-grade analysis on Patreon and covers market microstructure, derivatives, and systematic strategies on YouTube.

• 🎥 YouTube — Quantitative trading strategies and institutional market analysis: The Mathematical Trader

• 💼 LinkedIn — Connect for research updates and professional discussion: Navnoor Bawa

• 📊 Patreon — Exclusive deep-dives, trading models, and institutional-grade research: Join here

Cover photograph: Ajay Suresh from New York, NY, USA, CC BY 2.0, via Wikimedia Commons.

Cover photograph: Ajay Suresh from New York, NY, USA, CC BY 2.0, via Wikimedia Commons.

By Navnoor Bawa | YouTube | LinkedIn

Hedge funds posted their best year since 2009, with 12.5% returns and record $5.15 trillion in capital. TCI Fund Management generated $18.9B in profit, Bridgewater returned 33%, and D.E. Shaw delivered 28.2%. Yet beneath this success lies systemic fragility: equity correlation reached 0.92, leverage hit the 99th percentile, and crowded positioning created vulnerability. This comprehensive analysis examines who generated genuine alpha, how fee structures are evolving, and what risks loom for 2026.

Table of Contents

1. Industry Overview: The $5.15 Trillion Milestone and the Correlation Crisis

2. The Titans: TCI, Bridgewater, and the Concentrated Conviction Playbook

3. Multi-Strategy Dominance: Citadel, Millennium, and Systematic Diversification

4. Hidden Alpha: Alternative Strategies, Activism, and Structural Complexity

5. Leverage and Crowding: The Systemic Time Bomb

6. Gold, Crypto, and Alternative Assets: Diversification Beyond Equities

7. The Fee Structure Paradox: Premium Costs for Correlated Returns

8. 2026 Outlook: Four Critical Systemic Risks

Industry Overview: The $5.15 Trillion Milestone

The hedge fund industry crossed two historic milestones in 2025: 12.5% returns — the strongest calendar year performance since 2009 — and $5.15 trillion in total capital, the first time the industry surpassed the $5 trillion threshold. Capital expanded by a record $642.8 billion, composed of $527 billion from performance gains and $115.8 billion in net investor inflows, marking the strongest inflow year since 2007.

Yet beneath this surface success lies a structural crisis. BNP Paribas research revealed that hedge fund returns now exhibit a 0.92 correlation with the MSCI World index — the highest in at least five years and approaching levels last seen during the 2011 Eurozone debt crisis. For equity long/short funds specifically, correlation reached 0.98. Marlin Naidoo, BNP’s global head of capital introduction, warned allocators that hedge funds can no longer be relied upon for downside protection in equity market corrections.

This creates a paradox: at 0.92 correlation with equities and aggregate returns of 12.5%, the average hedge fund delivered approximately 5–6% after fees — meaningfully below the S&P 500’s 17.9% return available through a 0.03% Vanguard index fund. The industry’s record year was simultaneously its most expensive beta trade in history. The question isn’t whether hedge funds made money in 2025 — the question is whether they delivered alpha or simply charged premium fees for market exposure.

Yet this aggregate view masks critical dispersion. While the industry median delivered expensive beta, a select group of managers generated genuine alpha through three distinct approaches: maximum conviction with concentrated positions (TCI), superior macroeconomic intelligence (Bridgewater), and systematic diversification with tight risk controls (D.E. Shaw, Citadel, Millennium). Understanding how these titans succeeded reveals where true alpha still exists in an increasingly correlated industry.

The Titans: TCI, Bridgewater, and Concentrated Conviction

The industry’s record $642.8 billion capital expansion wasn’t distributed evenly — it flowed disproportionately to managers who demonstrated the ability to generate uncorrelated returns through conviction, intelligence, or structural advantages. Three distinct archetypes emerged as clear winners: the concentrated conviction player who holds nine stocks (TCI), the macro intelligence engine with 50 years of economic modeling (Bridgewater), and the systematic diversifier operating 320+ independent trading teams (D.E. Shaw, examined alongside multi-strategy platforms in the following section). Each archetype represents a different answer to the same question: How do you generate alpha when 0.92 correlation has turned most hedge funds into expensive index trackers?

The Concentrated Conviction Playbook: TCI’s Record $18.9 Billion

The largest single-year profit ever recorded by a hedge fund came from holding nine stocks.

Chris Hohn’s TCI Fund Management generated $18.9 billion in net gains in 2025 — surpassing Citadel’s 2022 record — with a 27% net return from its approximately $77 billion in assets. Total net gains since TCI’s 2003 inception reached $68.4 billion, placing it among the top five most profitable hedge funds of all time.

TCI’s Q3 2025 13F filing reveals a $52.7 billion portfolio compressed into just nine U.S.-listed positions. GE Aerospace represented ~27% (~$14.2B), Visa ~18% (~$9.6B), Microsoft ~16% (~$8.6B), Moody’s ~12% (~$6.3B), and S&P Global ~10% (~$5.4B).

GE Aerospace surged approximately 84% in 2025, driving the bulk of TCI’s returns from a single position. European holdings Airbus and Safran each gained over 40%. TCI increased its Visa stake during 2025 while trimming Alphabet in both Q1 and Q3 — a deliberate pivot from AI narrative risk toward payment infrastructure.

The Macro Titans: Bridgewater and D.E. Shaw

Bridgewater Associates posted a 33% return in its flagship Pure Alpha fund — one of its best in 50 years. Pure Alpha II gained 34%. All Weather rose 20.4%. Asia Total Return surged 36.9%.

Bridgewater’s newer AIA Macro fund, which leverages machine learning for investment decisions under Co-CIO Greg Jensen, delivered 11.9%. In March 2025, the firm launched the SPDR® Bridgewater® All Weather® ETF (ALLW) — making its risk parity approach available to retail investors for the first time.

In August 2025, Ray Dalio officially divested his remaining ownership stake and stepped down from the board. CEO Nir Bar Dea and Co-CIOs Bob Prince and Greg Jensen now lead the firm.

In Q3 2025 13F filings, Bridgewater slashed its Nvidia stake by nearly two-thirds and cut Alphabet by more than half, rotating into application software and payments companies — a deliberate pivot from “AI builders” to “AI beneficiaries.”

D.E. Shaw’s Oculus Fund returned 28.2%, continuing its streak of zero negative years since inception in 2004 — a 21-year unbroken record with ~14% annualized returns. The Composite Fund added 18.5%. The firm manages over $85 billion and made the unusual decision to suspend returning profits to clients — signaling it saw enough opportunity to keep capital fully deployed.

Multi-Strategy Dominance: Citadel and Millennium

While concentrated conviction (TCI with 9 stocks) and macro intelligence (Bridgewater with economic models) delivered alpha at opposite extremes of the complexity spectrum, the industry’s center of gravity shifted decisively toward a third model: multi-strategy “pod shop” platforms. These diversified, tightly risk-managed operations — led by Citadel and Millennium — dominated capital inflows despite generating more modest returns than the concentrated players. The appeal was structural: rather than betting everything on Chris Hohn’s nine-stock portfolio or Ray Dalio’s macroeconomic worldview, allocators could access 100+ independent strategies under one roof, each tightly risk-controlled and capable of being shut down within days if performance faltered.

This wasn’t alpha at the extremes — it was alpha through diversification, operational excellence, and brutal talent selection. And in 2025, it proved that investors valued predictability over headline-grabbing returns.

The multi-strategy “pod shop” model dominated 2025. The segment delivered a weighted average return of 22.7% and attracted $53.4 billion in net inflows.

Fund-by-fund results: ExodusPoint Capital +18% (best year on record, ~$12B AUM). Balyasny Asset Management +16.7% (~$29B AUM). Schonfeld Strategic Advisors +12.5% flagship / +16.5% Fundamental Equity ($17.5B AUM). Citadel Wellington +10.20% — weakest since 2018, returning ~$5B to clients. Citadel Tactical Trading +16.3% through November, outpacing the flagship. Millennium Management +10.5%, recovering from a $900M February loss.

Millennium’s $900 Million February Loss

Two teams led by PMs Glen Scheinberg and Pratik Madhvani built leveraged positions predicting index rebalancing changes. When volatility spiked and crowded competitors reversed simultaneously, Millennium suffered $900 million in losses — its worst monthly hit in over six years. Senior PM Jeremy Ma subsequently departed.

Millennium’s pod model survives through brutal risk discipline: if a team loses 5% of allocated capital, its capital is halved; at 7.5%, the pod is terminated. Roughly 15–20% of PMs are rotated out annually. The firm runs 320+ independent trading teams across relative value equity, equity arbitrage, fixed income/commodities, and quantitative strategies.

In November 2025, Izzy Englander sold a 15% minority stake in the firm at a $14 billion valuation. Millennium also launched a $5 billion Opportunities Fund targeting longer-duration private assets — asset-backed debt, real estate, and low-correlation strategies.

📊 Want Deeper Quantitative Analysis?

This research took extensive data collection, verification, and analysis. If you found value in this deep-dive, I publish exclusive quantitative research, trading strategies, and institutional-grade analysis on Patreon.

By joining, you’ll be supporting my work and motivating me to publish more content like this.

→ Join the Patreon community here

Hidden Alpha: Alternative Strategies and Activism

The titans (TCI, Bridgewater) and pod shops (Citadel, Millennium) represented different paths to alpha, but they shared one critical limitation: their strategies — whether concentrated equity, macro overlay, or diversified long/short — all operated within markets increasingly dominated by algorithmic competition and converging information edges. By 2025, genuine alpha increasingly migrated to domains where human judgment, specialized expertise, and structural complexity still created exploitable inefficiencies.

This is where 2025’s most significant uncorrelated alpha generation occurred: software sector shorts exploiting AI disruption before consensus formed, convertible arbitrage requiring bond math expertise most equity managers lack, Treasury basis trades operating at 20–30x leverage in repo markets, and activist campaigns forcing corporate restructurings through multi-year engagement. These weren’t beta trades dressed up as alpha — they were strategies that required domain expertise that couldn’t be easily replicated by the thousands of generalist equity hedge funds crowding into the same AI and tech stocks.

Software Sector Shorts: $24 Billion in Profits

Short-sellers realized $24 billion in paper gains on software positions through early February 2026, according to S3 Partners data, as AI disruption erased moats that had sustained premium valuations. The software sector’s total market value declined by $1 trillion during this period. Forward P/E multiples collapsed from 35x to 20x — the lowest since 2014.

Third Point’s Q4 2025 investor letter explicitly stated that AI is “forcing a re-evaluation of how market moats are perceived” — and the fund rotated from software into semiconductors, memory, and semicap equipment.

Convertible Arbitrage Renaissance

LMR Partners’ convertible arbitrage team achieved approximately 30% net return through mid-October 2025 — one of the strongest performances in the strategy’s modern history. Global convertible bond issuance surged to $50.7 billion across 69 deals in Q2 2025 alone, with AI-linked companies accounting for roughly one-fifth of all new issuance.

Treasury Basis Trade: $1–2 Trillion in the Shadows

Hedge fund Treasury basis trade exposure reached an estimated $1–2 trillion in notional value. Hedge funds held 10.3% of all Treasury cash securities in Q1 2025 — up from pre-pandemic levels. Leverage in the trade typically runs 18–35x through repo market financing.

Federal Reserve officials warned these “crowded and highly leveraged trades” make the Treasury market more vulnerable to stress.

Elliott Management’s Activist Machine

Elliott Management ran a record 18 activist campaigns in 2025, deploying nearly $20 billion in capital across $79.8 billion AUM.

Honeywell ($5B+ stake): Elliott pushed for separation of Aerospace from Automation, estimating 51–75% share price appreciation. In February 2025, Honeywell announced the split into three independent public companies. By May, an Elliott partner joined the board.

Southwest Airlines (11%→~16% stake): Elliott forced the retirement of Executive Chairman Gary Kelly, replaced six board members, and drove the introduction of assigned seating, premium tickets, and redeye flights. Southwest also executed its first-ever company-wide layoffs.

Despite this activity, Elliott’s own fund returned just 4.7% through September 2025 — underperforming the S&P 500’s 15%. Activist alpha takes years to crystallize.

The Single-Stock Conviction Bets

Bill Ackman’s Pershing Square returned 20.9% NAV in 2025. Alphabet contributed 10.3% to total returns — the largest single contributor. Ackman cited Google’s AI leadership and proprietary chips. Ackman sold Chipotle (-4.6% to gross returns) and Nike (-2.5%), initiated a $2 billion Meta position in November and an Amazon stake in April. Outsized positions in Fannie Mae and Freddie Mac — a pure policy bet on GSE release from conservatorship — were among top contributors.

Tiger Global’s private fund PIP 16 gained 33% YTD, driven by AI-linked positions in OpenAI, Stripe, Scale AI, ByteDance, and Databricks. The firm made only 9 new private deals — down from 200+ in 2021: a deliberate shift to concentrated, high-conviction deployment. Tiger added a new position in Klarna at its September 2025 IPO, which priced at $40/share — valuing the company at $15.1 billion — and surged 30% on its first day of trading.

Coatue Management’s CTEK fund returned 20.19% in 2025. Philippe Laffont initiated a $749 million Arm Holdings position, boosted Nvidia by 34% in Q2, increased Broadcom by 60%, and initiated a new $843 million Oracle stake. Portfolio value grew from $22.7B to $40.8B. He simultaneously slashed AMD by 53% and fully exited Super Micro Computer.

The Breakout Performers

Apis Capital Advisors: +55.1%. Longs contributed 11.9% gross, shorts 0.8% gross. 68% net long. AUM $800M+. Edge was in neglected small/mid-cap stocks (median market cap ~$3B) across technology, healthcare, industrials, and consumer sectors — where fewer algorithms compete. AUM has quadrupled since 2020.

Melqart Opportunities: +45%. Event-driven/merger arb; run by Michel Massoud.

Whale Rock Capital: +45%. S-Curve investment approach. Top holdings: Celestica 8.68%, AppLovin 8.22%, Nvidia 7%. Celestica position generated 1,000%+ returns since initial purchase. AppLovin also returned 1,000%+ since initiation. Alex Sacerdote strategically entered Nvidia in Q4 2022 — now up ~900%. Despite a -20% Q1 2025 loss in the Flagship fund due to tariff-driven tech volatility, the Long Opportunities fund finished the year at +45%.

Leverage and Crowding: The Systemic Time Bomb

The industry’s record performance and capital growth occurred against a backdrop of extreme leverage and concentrated positioning that created systemic fragility. Prime brokerage data revealed hedge funds operating at the highest gross leverage levels since 2020 — with quantitative and multi-strategy funds pushing into uncharted territory. This leverage amplified returns in 2025’s rising market, but it simultaneously created the conditions for a violent deleveraging event should market conditions reverse.

Goldman Sachs prime brokerage data showed gross leverage at 292.8% in December 2025 and 294% in June — the highest since 2020. JPMorgan reported 297.9% in November — a five-year high. Morgan Stanley observed leverage at the 99th percentile of readings over the preceding 15 years.

Multi-strategy funds averaged 444% gross leverage. Quantitative funds averaged 645%.

The October 2025 Warning Shot

Systematic hedge funds suffered approximately 1.8% in losses over four trading days (October 1–7) — their worst four-day stretch in nearly two years. The S&P 500 and Nasdaq hit record highs the same week. Goldman Sachs called it a “textbook example of a multi-layered quantitative fund unwind.”

Hedge funds maintained crowded longs in Alphabet, Microsoft, and Meta and crowded shorts in IBM, Strategy (formerly MicroStrategy), and Synopsys. When momentum reversed, the synchronized exit amplified losses.

Stanley Druckenmiller confirmed the rotation thesis: his Q3 2025 13F showed Duquesne dumped its entire Microsoft position and liquidated AppLovin, while making the iShares MSCI Emerging Markets ETF and Amazon his top new buys.

Gold, Crypto, and Alternative Assets

The leverage and crowding data revealed a fundamental problem: by concentrating in the same AI-driven technology stocks with 0.92 correlation to public equities and 292–645% gross leverage, the industry had created synchronized exposure to a single macro bet. When that bet worked — as it did through most of 2025 — the returns were spectacular. But the October 2025 systematic quant unwind demonstrated what happens when positioning converges: a 1.8% four-day loss despite the S&P 500 hitting record highs.

Elite managers recognized this vulnerability earlier than most. As leverage reached extremes and equity correlations approached 1.0, a subset of hedge funds increasingly sought alpha in non-traditional asset classes — particularly gold and cryptocurrency — that offered low correlation with equity markets and protection against policy uncertainty. These alternative exposures represented a strategic diversification away from the crowded AI and technology trades that dominated equity portfolios.

Gold surged past $3,000/oz in 2025, reaching over $4,300 at its October peak, driven by 863 tonnes of central bank purchases. Institutional gold ETF demand surged to 801 tonnes, a 78% increase from the five-year average. Total investment demand hit a record 2,175 tonnes. Ray Dalio, David Einhorn, and John Paulson publicly endorsed gold as protection against policy shocks and fiscal deficits.

Crypto exposure reached critical mass. Total crypto hedge fund AUM hit $136.2 billion — an all-time high. Over 55% of traditional hedge funds held digital assets, up from 47% in 2024. BlackRock’s iShares Bitcoin Trust (IBIT) surpassed $50 billion in AUM within eleven months of its January 2024 launch, capturing 48.5% of the Bitcoin ETF market and becoming BlackRock’s top revenue generator.

The Fee Structure Paradox

The expansion into alternative assets — gold, crypto, convertible bonds, Treasury basis trades — demonstrated hedge funds’ ability to access uncorrelated returns when willing to move beyond traditional equity long/short frameworks. Ray Dalio’s gold advocacy, institutional crypto adoption reaching 55% penetration, and BlackRock’s $50B Bitcoin ETF all validated that alpha still existed in less-efficient markets.

Yet this diversification solved only half the problem. It proved hedge funds could generate uncorrelated returns — but it couldn’t solve the industry’s fundamental economic problem: the erosion of the traditional fee model and the resulting compression of net returns to investors. As hedge funds delivered increasingly correlated returns with public equity markets (0.92 aggregate correlation), the justification for premium fees came under unprecedented scrutiny. The question wasn’t whether elite managers could generate alpha — TCI’s $18.9B, Bridgewater’s 33%, and the $24B software shorts proved they could. The question was whether the industry median justified its fees when correlation approached 1.0.

The traditional “2-and-20” model continues to erode: average management fees have declined to ~1.35%, while nearly half of hedge fund managers are considering fee structure changes. Pass-through fee models — which charge investors directly for PM compensation, technology, and operations — now add 700–800 basis points to effective costs at multi-manager platforms, even when the advertised management fee is 0–1%.

The structural implication: at 0.92 correlation and an aggregate 12.5% return, the average hedge fund delivered roughly 5–6% after fees — meaningfully below the S&P 500’s 17.9% return available through a 0.03% Vanguard index fund.

2026 Outlook: Four Critical Risks

The fee structure paradox illuminates a deeper truth about the industry’s bifurcation: while aggregate statistics showed 0.92 correlation and 12.5% returns (suggesting expensive beta), the top decile of managers gained 62.7% while the bottom decile lost 12.8% — a 75.5-percentage-point spread. This wasn’t a normal distribution around an industry median — it was a bimodal distribution separating elite alpha generators from expensive beta replicators.

This dispersion reveals the industry’s fundamental split: a small cohort generating genuine alpha versus a broad middle delivering correlated returns at premium fees. The structural risks heading into 2026 threaten both groups, but for different reasons. Elite managers face liquidity constraints and capacity limits. The broad middle faces an existential question about their value proposition. And both face four systemic risks that could trigger industry-wide deleveraging:

1. Correlation risk is systemic. At 0.92, the industry cannot deliver downside protection. Naidoo warned allocators to “reconsider their assumptions” about strategy performance in varying conditions. When equity markets correct, hedge fund portfolios will fall in lockstep.

2. Leverage is at extremes. At the 99th percentile of 15-year historical readings, even a modest deleveraging event would cascade through prime brokerage. Quant funds at 645% gross leverage are especially exposed. The mechanics of forced unwinding — margin calls triggering position liquidations triggering further margin calls — create reflexive downward spirals.

3. Crowding creates fragility. The October 2025 systematic crash was a small preview. An AI narrative reversal would trigger coordinated unwinding across thousands of funds holding identical positions. The software short squeeze demonstrated how quickly $24 billion in gains can materialize when positioning unwinds — the reverse scenario poses equal risk.

4. Alpha is real — but concentrated. TCI’s $18.9 billion, Bridgewater’s 33%, LMR’s 30% from convertible arb, and the $24 billion in software shorts prove genuine alpha exists. But it exists at the extremes: maximum conviction (Hohn), maximum information edge (Bridgewater), or maximum structural complexity (basis trade, convertible arb). The vast middle delivered correlated beta at premium fees.

These four risks — correlation failure, extreme leverage, crowded positioning, and alpha concentration — interact systemically. A correlation breakdown triggers deleveraging, which forces position liquidation, which reveals crowding, which amplifies losses across the industry. The October 2025 quant unwind was a small-scale preview of this cascade. A full-scale version would make 2020’s March deleveraging look orderly.

The Verdict

The hedge fund industry’s record $5.15 trillion in assets and best performance since 2009 validates its expansion — but only at the extremes. For elite managers who generated uncorrelated alpha through concentrated conviction (TCI’s $18.9B from nine stocks), superior intelligence (Bridgewater’s 33% from macro modeling), structural complexity (LMR’s 30% from convertible arb), or early positioning (the $24B software shorts), 2025 definitively proved their value proposition. These managers justified premium fees by delivering returns that couldn’t be accessed through passive alternatives.

But for the industry aggregate — which delivered 0.92-correlated returns of 12.5% at management fees averaging 1.34% plus performance fees and pass-through costs, versus the S&P 500’s 17.9% return at 0.03% cost — the existential question remains unresolved: Are investors paying for alpha or for leveraged equity exposure with extra steps?

At record leverage (292–645% gross), extreme crowding (identical positions across thousands of funds), and the highest equity correlation in over a decade (0.92), the $5.15 trillion question isn’t whether hedge funds made money in 2025. It’s whether they can protect capital when the four risks converge — and whether that protection is worth the premium fees when correlation approaches 1.0 and the median manager delivers market beta at hedge fund prices.

The dispersion statistics answer this clearly: alpha is real, but it’s concentrated at the extremes. For the vast middle of the industry, 2025 may have been a record year — but it was also the year that proved correlation has made most hedge funds obsolete, except for the elite few who still know how to generate returns that can’t be bought through Vanguard.

📊 Want Deeper Quantitative Analysis?

This research took extensive data collection, verification, and analysis. If you found value in this deep-dive, I publish exclusive quantitative research, trading strategies, and institutional-grade analysis on Patreon.

By joining, you’ll be supporting my work and motivating me to publish more content like this.

→ Join the Patreon community here

Every claim in this article is supported by inline citations linking directly to verified primary sources including HFR, Hedgeweek, Forbes, Institutional Investor, Investing.com, SEC 13F filings, BNP Paribas research, Goldman Sachs prime brokerage data, JPMorgan reports, and fund-specific investor letters.

About the Author

Navnoor Bawa is a quantitative research analyst specializing in systematic trading strategies and hedge fund analysis.

Connect:

• 🎥 YouTube: @TheMathematicalTrader — Subscribe for video breakdowns of quantitative strategies, institutional trading techniques, and market analysis

• 💼 LinkedIn: navnoorbawa — Professional updates and research

• 📈 Patreon: Exclusive quantitative research and trading strategies — Support my work and access premium content

About this Analysis: This comprehensive review covers the complete hedge fund industry landscape in 2025, including detailed performance breakdowns for TCI Fund Management (Chris Hohn), Bridgewater Associates (Ray Dalio), D.E. Shaw (David Shaw), Citadel (Ken Griffin), Millennium Management (Izzy Englander), Elliott Management (Paul Singer), and other leading funds. Analysis incorporates official data from HFR Index reports, prime brokerage leverage statistics, BNP Paribas correlation studies, SEC 13F filings, and investor letters to provide institutional-grade insight into hedge fund returns, risk metrics, fee structures, and 2026 outlook.₹

Cover photograph: Ken Lund from Reno, Nevada, USA, CC BY-SA 2.0, via Wikimedia Commons.