Millennium Management was founded more than 30 years ago, it is known as one of the industry’s best-performing hedge funds, having only one down year – 2008.
In the 2020 COVID 19 pandemic presented an ultimate stress-test for the hedge fund industry and Millennium finished the year with double-digit returns, with only one down month in March.
We will attempt to break down the structure of the firm below, focusing on outlining the approach taken to generate consistent returns. We will look at how the global pandemic affected all four parts of the business and will highlight Millennium’s plans in 2021.
Millennium is the largest platform hedge fund with over $48Bn (December 2020) in assets under management. The business is divided into four strategies: RV Fundamental Equity, Equity Arbitrage, Fixed Income and Quantitative. Overall, there are more than 240 independent teams with over 1650 investment professionals.
On the surface, the business has access to an enormous amount of capital, however similarly to other hedge funds, Millennium has also suffered from redemptions in the past. In 2008 investors pulled money, cutting the firm’s AUM in half. The firm’s shorter-term capital (those investors who pledge assets for one year) currently accounts for circa 70% of total AUM, this leaves the firm in a vulnerable position during turbulent years. Millennium has been trying to increase the lock-up period since 2008 and in 2020 the firm finally made the first step. Earlier in 2020 Millennium announced that any additional money raised will now be deemed committed capital, meaning investors will be able to withdraw only 5% each quarter, therefore it would take five years to cash out completely. Furthermore, to support the shift towards a more stable capital base, the firm will return $8 Billion to investors at the end of the year further phasing out short-term capital. The intention is to create a quasi-private equity style 3+ year lock-up period to continue strategic long-term growth plans. Moreover, the firm will be raising additional capital, with an aim to raise $6 Billion from long term investors. These efforts are boosted by the firm’s steady three-decade track record that would appeal to the long-term investors thus making a transition to a longer lock-up periods achievable in a short term.
2020 has not been an easy year for most of the funds, Millennium also initially struggled with the sudden volatility that arose in March. However, the firm has come out stronger and more convincing than some of its large multi-manager competitors, posting close to 23.3% returns for the year. Following these positive gains, the firm decided to further grow their investment team, giving preference to strong teams as opposed to individual PMs.
In 2020 Millennium’s growth plans have extended beyond its major hubs in Europe and the US. Millennium’s business in Hong Kong rapidly expanded with the number of staff registered with the local regulator rising to more than 80 from about 60 at the start of the year. The focus on the expansion of the Hong Kong-based investment team has been noteworthy, with both PM’s and complete teams joining the firm. Another area of focus in recent months has been the Middle East where, Millennium has sought to increase its presence among local investors by adding talent on the ground as well as allowing PM’s who were keen to relocate, the possibility to do so. The firm currently houses 7 PM’s in the UAE, with a particularly large focus on equity indices trading Asia and Europe. Whilst marketing in the Middle East hasn’t proved easy in past years for American hedge funds, Millennium are keen to grow, conscious of their reputation and track record and will look to increase market presence and benefit from an increased appetite towards the hedge fund space from the SWF’s and Institutional Investors in the area.
Investment Team Structure
The firm has a unique structure that grants portfolio managers complete freedom to operate in independent silos (pods) with over 240 of these “pods” currently running globally. Millennium operates a "master feeder" structure: money is initially placed into sub-funds managed by individual PM’s or teams. These funds are then pooled into a larger fund.
Separately, they firm also offers a seed option to outside funds; however, the firm sees no significant distinction between its internal portfolio managers and those who work in outside firms seeded by Millennium. The external managers may run similar strategies as Millennium’s own portfolio managers and are subject to the same risk controls, but in certain cases, the firm can negotiate terms that allow certain traders that prefer to, to remain independent. With one of the most competitive pay-out formulae on the market and a large amount of capital, Millennium is attractive for Portfolio Managers that run very liquid, closer focus relative value/market neutral strategies.
Generally, the setup grants PMs even more autonomy than fellow multi-strategy funds as, the firm doesn’t intervene with a house view nor is there a firm requirement to fully deploy allocated capital. The freedom, however, ends there; Millennium runs a tight ship when it comes to risk limits and loss parameters. The firm has hard requirements for ample liquidity across all strategies, with margin allowance varying between 60-75% dependant on the mandate. This, paired with tight risk and loss parameters allows for the firm to sustain its unique approach to multi-manager portfolios. We’ve broken down some of these below:
1) Average Vol tolerance per liquid strategy is 3-4% - This indicates a clear preference for market-neutral strategies that do not expose themselves to single events in a drastic manner.
2) Maximum cumulative drawdown is between 4-5% (this is a hard requirement across all portfolios and strategies) When the limits are hit: a) Allocated Capital is halved after the first drawdown. b) Drawdown tolerance (stop/loss) is reduced to 3% for the next cycle (usually between 45 and 90 trading days)
3) VaR Limits are very restrictive, especially within the fixed income side of the business which sees average limits of 1.75-2.5% to the dollar.
Most Portfolio Managers deploy 60%-75% of their allocated capital as a result of a strong hold on liquidity. This results in a smaller chance of the pod hitting the drawdown limit and whilst this may hinder maximisation of returns, it also helps guarantee stability.
When it comes to pay out structures, Millennium rewards its risk takers well, with formulas in some cases reaching 25%. The firm is, however, quick to get rid of underperforming teams. The business tends to regularly re-organise its investment team to best keep in line with current trends and to manage eventual risk.
This year the rigid risk limits resulted in more than 15 pods being shut down due to losses caused by the violent market swings during March. Millennium lost 3% that month, however, an effective re-balance of the overall talent and portfolios ensued and the firm posted positive returns in the following month. The positive performance continued over the summer and autumn, bringing year-to-date gains to 23,3% as of 17th December 2020.
Millennium is broken down into four primary strategies. In 2019 Millennium had close to 40% of its allocation in relative-value fundamental equity, 19% in quant strategies and equity arbitrage, and 22 % in fixed income. In 2020 Fundamental equity remains the biggest strategy, however, the firm has been growing their Quantitative division incrementally as well as expanding the focus of the fixed income hires made. The four core strategies are broken down further below:
Fundamental Equity Relative Value:
Fundamental Equity remains the biggest strategy in Millennium, all strategies are RV with no directional or tail risk, unless for the positive carry. The firm encourages Large Cap focus over the less liquid Small Cap names and, whilst there is global coverage, heavy concentration across the firm remains on the developed geographies within US and European names. The overall equity portfolio consists of 61.2% of Large Cap names, 24.8% of Mid Cap names. The firm invests cross sectors with the biggest exposure to Healthcare (16.3%) and in Technology (14.5%). The target returns for funds within the FERV business is in the high single digits with an estimated vol of between 2 and 6 depending on geographic exposure. It is typical to have sub books within the pods in the Fundamental Equity division of Millennium.
Millennium’s exposure to equities is its largest across all strategies and, it houses multiple stand-alone PM’s as well as being prone to onboarding existing businesses who receive increases in capital and leverage facilities and benefiting from a state-of-the-art infrastructure unlike any other. Some PM’s that have a long tenure with the firm, may receive seed capital to start their own ventures. Some PM’s that decided to span out have eventually opted to return, as Millennium provides the infrastructure and set up that is hard to compete with, moreover they take care of the asset raising. One recent example, is the onboarding of Centricus Capital Management, a fund run by ex Millennium PM Sara Nainzadeh which in summer 2020 returned to the mother land. It will continue to pursue a broad focus across transport, utilities, consumer and industrial stocks benefitting from a decrease in costs relating to operational infrastructure and released pressure on marketing/client relations.
Equity Long/Short will continue to be Millennium’s largest offering and, in the foreseeable future, diversification will be sought in areas where the fund has traditionally operated in less. Healthcare and Tech will continue to be prominent, as will Asian equities, with the firm keen on capitalising on the huge growth of the continent’s cyclical stock sectors such as industrials and materials. Consumer goods which, in the past has been less of a focus, will also return to the fold as one to watch, as the ripple effects of a global pandemic, Brexit and a change in presidency for the US all take their toll on the markets.
This side of the business includes structured equity derivatives strategies as well as Delta One, Merger and Risk Arbitrage mandates and has 19% of Millennium’s allocation in these strategies. Equity Arbitrage suffered quite a bit during the March sell-off, in fact, both Merger Arbitrage and Delta One Portfolio Managers were stopped off and eventually let go. This move later on proved costly as, had there been more flexibility in the pursuit of the Volatility, positive returns could have ensued . The mandate of the firm in 2020 was to grow Vol and Tail exposure within both equities and fixed income, in fact there are several PMs that joined Millennium across London and the US to support the expansion. A large tranche of the $3.1 Billion raised in February was committed to these efforts. A trader from Capula’s flagship Tail Risk fund join to bolster this division in London earlier this year.
Convertible bond arbitrage has also seen a huge growth in interest during 2020, due to the big year for new issuance of corporate bonds. Millennium has been actively looking to hire within the space, having previously been reluctant to add to what is a traditionally more volatile strategy set.
In the coming year, Millennium will seek to diversify its arbitrage offering further, with a view of adding teams or single PM’s that have capitalised effectively on the volatile markets and who will see benefit from the delayed onset of many deals, especially in the M&A space. Tail protection and volatility arbitrage portfolio managers remain on the agenda, as does the possibility of hiring PM’s from the synthetic equities/Delta One space, as longer term capital can be effectively traded with yield enhancement strategies using an aggressive balance sheet management style.
Fixed Income strategies have 22% of Millennium’s AUM. This year this division has grown across all sectors, making hires in credit as a primary focus as well as in MBS, Rates and FX Vol RV. In Commodities, Millennium added PM’s focused on metals in time to benefit from the rally in late Q1 and early Q2 of 2020.
Portfolio Managers sitting in the Fixed Income division tend to be asked to ramp up risk after circa 6 months if they have posted positive returns. There is a tendency to grow junior Portfolio Managers within this side of the business, risk takers typically get larger allocations from day one comparing to the other divisions. This can be seen as a way of allowing for a more balanced approach to markets that won’t cause PM’s to have to go “all-in” on risky bets. As in all other areas of the firm, risk in the fixed income strategies is managed in an extremely cautious manner with very aggressive stop losses that vary between 4.75 and 6% depending on the strategy. Max drawdown is 2x30 and must not exceed 4% of capital in any given timeframe. Despite the heavier equity focus overall in Millennium, the firm offers a robust quantitative and research infrastructure for Vol and RV strategies across FI. The business also has a set up for macro strategies but they are not a big focus because of the typically lower Sharpe and higher Vol exposure, which in turn often flags risk parameters.
As an example to the latter statement, the firm’s largest Macro Vol Pod decided to expand in 2019, diversifying its strategies adding 3 liquid macro credit PM’s to trade convexity and CDS v Index mandates. This particular pod’s main strategy however, took a long volatility view and to diversify had added individuals who were more short term. March’s violent swings caused changes in sentiment which led to 2/3 PM’s most recently onboarded, being let go as the volatility proved hard to handle for these more junior profiles.
The firm has maintained its intent to add senior talent in the macro space in Asia; Millennium actively hired in Asia this summer following the volatility of Phase 1 of the Covid-19 pandemic. Millennium onboarded former Astignes lead duo, Abhay Golecha and Arjun Shetty in June to bolster their efforts in Asian rates and FX. Pratek Gupta, former lead PM of BlackRock’s Asia Fixed Income business was also onboarded in Singapore to focus on Asia local currency macro investments within FX and rates.
Liquid credit strategies will continue to be of interest in 2021, with multiple PM’s having joined towards the end of 2020 including Rokos Capital ex Jason Feasey who will build a corporate and sovereign bond focused portfolio in London. In the US, Millennium added two senior portfolio managers to their ranks, onboarding ex Angelo Gordon head of liquid credit, Pranav Kanade and ExodusPoint corporate credit PM Michael Morris who joins to build on the businesses’ intentions to amplify their exposure to tech and energy credit.
The firm’s focus for the year ahead seems to be within Credit and EM Rates with Asian rates being a particular area of interest due to the shift in basis strategies and the end of LIBOR causing a reduction of the opportunity set in traditional G3 markets. Furthermore, the business is looking to gain exposure to lower risk, absolute return strategies by hiring Portfolio Managers from traditional Asset Managers. Millennium was hit hard in March, like the other large multi managers, by the basis losses caused by huge leverage within the saturated US swaps market.
Millennium’s Quantitative Strategies account for 19% of overall AUM. The business is one of their four diversified pillars within which they build and constantly enhance investment processes that are wholly quantitatively driven. The format of the business is slightly different to the other pillars as, within Quant strategies, very often pods are composed of multiple individuals as opposed to single, stand alone PM’s. In fact, it is common for a team within QS to be composed of a senior PM, one or two quantitative researchers and a developer or, in the case of a new, large scale operation, a CTO.
Millennium sought to actively amplify its quantitative strategies division throughout 2020. This was a result of both a pre-existing desire to onboard systematic portfolio managers in parallel to the hires made at sister fund WorldQuant, as well as in response to the opportunity set that opened up within the macro systematic space. The first step towards this, was the appointment of Ross Garon in August 2020, as the Global Head of Quantitative Strategies. Ross will be responsible for all aspects of the QS business, including managing portfolio managers, hiring and growing new teams, managing risk and capital allocation, and developing resources for investment professionals.
Ross’s role will be multi-faceted as the firm seeks to expand their in-house systematic arms across all asset classes, in an effort to bridge the gap with its fast-paced sister fund WorldQuant. One of his first hires at Millennium was Stephane Fischhoff, the ex-head of Systematic Macro strategies at Marshall Wace, who recently returned to the firm to launch a new intra day macro systematic futures fund focused on equities and FX. This business will operate under the Quant Strategies umbrella however, they will build an independent quantitative infrastructure built in synergy with WorldQuant’s. This strategy is predicted to grow to 2.5 Billion and will be levered 4 times.
Unlike WorldQuant that has seen a 20% reduction in headcount this year, Millennium has not downsized the team and, in fact, it has added to and will continue to expand its Quantitative division in 2021 with further investment talent focused on quantitative investing.
We anticipate the emphasis will be on team buy-outs and potential seed deals. Generally, Millennium has started to introduce a more quantitative approach to investing, across all pillars. For instance in 2020 Millennium acquired the QT Fund from Credit Suisse. Whilst this business has a quantitative focus, it will report into Millennium’s global head of equities Pete Santoro and will be led by Jim Wu – CEO of Millennium Technologies.
Millennium remains one the biggest and most successful hedge fund platforms in the world. The longevity of the firm and its successes have allowed for them to be the preferred option for talent when up against competitors even if perhaps, the other offers had slightly better components to their set up. This is in many respects owed to Millennium’s neutral approach to the sanctity of the single PM’s investment process, so long as it aligns itself with the parameters set by the firm.
Millennium’s closest competitor by similarity of structure is ironically, its most recent spin off, launched in 2018 as Exodus point. The name chosen saw it labelled the hub for those PM’s that had grown frustrated with the inflexible nature of Millennium’s risk exigencies and sought to stand alone in a new venture. Whilst raising the largest amount of capital in history for a new launch multi-strategy platform, the firm initially struggled in the first two years to maintain the comparison with its elder brother and this has led to a re-organisation of its initially looser risk tolerance, to further assimilate itself with Millennium tight grip and firm stance on stop/loss.
Scepticism has remained around Millennium’s ability to retain talent, something that the firm has aimed to address in recent years. One such way it has done this, is via its strategic targeting of larger teams which, it can see as a more stable and higher conviction investment from a talent perspective, considering the pre-existing dynamics in place. The logic followed is that, it is more likely to succeed in onboarding and retaining 10 high performing, strong teams that will excel within the infrastructure and set up, as opposed to 30 standalone PM’s that may generate the same amount of PnL. The focus on team acquisitions and the onboarding of businesses has started in 2020 and will continue to be a focus moving forward, with the necessity to maintain a transparent and long-term focused investment horizon to meet the needs of the new investor base it has acquired.