The Math That Explains How Multi-Strategy Hedge Funds Make Money
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What exactly is a multi‑strategy hedge fund and why are they so popular on Wall Street?
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Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, we're back on the multi-strap beat.
I love this beat. I think it's really interesting. There's a lot we've learned, but there's a lot we haven't learned. I love this beat. If we if you said we're gonna just do ten episodes about this, I'd be like, Yeah, that's fine. That well yeah.
I look forward to part six hundred and seventy-eight in our ongoing attempt to understand multi-strat hedge funds. But you know, we've been sort of learning as we go along, and there are a bunch of questions that I still have. Uh one of them is there seem to be a lot of different opinions and variations of pod shops, right? On how exactly they can be designed.
Right. So there's different sort of structures that I understand. There's different compensation structures. There's different degrees to which the different pods, so to speak, coordinate with each other. There's different degrees and to which they like centralize ideas and research. So like I get that. There are still some big questions in my mind. And I'll just say one of the big ones right off the bat, which is If you have a bunch of teams doing a bunch of different strategies and trading a bunch of things, why are the returns good instead of average? Because in my intuition, if you have a bunch of teams, like, okay, you're diversifying alpha across a bunch of things, but great, but then you have a bunch.
My gut intuition would be like you don't get great returns, you get average returns. And yet many of them put up really impressive returns year after year after year. And I don't think I totally have a grasp of why.
Well, yes. And this is a question that I have, which is eventually the pod shops, some of them are getting very, very big, right? And so if you have a thousand pods working under your roof. That's a bit extreme. But at some point aren't you just sort of replicating the market and that alpha opportunity as you just described kind of goes away. Well, on that note, I am happy to say we have the perfect guest to discuss all of this. So these sort of variations behind multi-strat funds and also the math that actually powers it. We're going to be speaking with Dan Morillo. He is the co-founder of Freestone Grove Partners and also ex Citadel. So again, the perfect person to be speaking to. Dan, welcome to the show.
Thank you. Thank you for having me.
I guess my first question is, why are we talking to you?
Yeah.
Why
are we talking to you?
Well, you're probably in a better position to answer than me, but I guess I'll tell you my background and hopefully that helps us out a little bit. So I I've been about twenty five years now dating myself in the buy side. on the hedge fund buy side in particular. And I grew up sort of on the quantitative side of the world. I thought I was going to be a professor. And then I realized that life is more exciting on the industry side of things. Um and I've done a wide range of roles in the quote quant side of the world. So everything from, you know, at some point I was the lead of the global longshore business at Barclays Global Investors before BlackRock acquired them. At BlackRock, I stuck around for a bit.
I at some point ran the research group for iShares. I also was one of the founders of the model solutions business there. As you said, I was at Citadel, where I had responsibility for the equity quantitative research group that did a lot of the stuff that you guys have talked about, the risk model stuff and the hedging stuff and all of these sorts of things.
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Chapters
8 chapters
1
What exactly is a multi‑strategy hedge fund and why are they so popular on Wall Street?
0:00–7:18
2
How do different pod‑shop structures affect business models and performance?
7:18–14:32
3
What criteria does Freestone Grove use to identify and recruit top portfolio managers?
14:32–22:37
4
How does Dan’s math explain the relationship between diversification, correlation and the firm‑wide Sharpe ratio?
22:37–30:44
5
What compensation frameworks are used to align incentives between analysts and the firm?
30:44–37:34
6
How does crowding risk influence scale decisions and capital allocation in a multi‑strategy fund?
37:34–45:07
7
In what ways are AI and advanced data analytics reshaping the multi‑strategy landscape?
45:07–51:55
8
What practical steps should a college student take today to break into a multi‑strategy hedge fund career?
51:55–59:24
Speakers
6 identifiedMore from Odd Lots
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