Probably Approximately Correct

Ex-hedge fund lawyer here. Helped set up these multi-manager multi-strategy hedge funds. There are a few distinctions here: 1. These platforms achieve economies of scale by maintaining a central ‘book’ that aggregates and offsets positions coming from all pods so they don’t pay duplicative fees. The best multi-strat funds have an algo that allocates capital very efficiently across multiple pods as a result. It’s similar to BigLaw’s ‘staffing model’ just that BigLaw never had a sophisticated algo to deploy associate capacity. 2. They prune extremely quickly if a PM doesn’t perform, usually by experiencing a sharp drawdown. It’s called a ‘stop-out’. The PM walks out the door quickly. BigLaw pruning isn’t as brutal once you become an EP. 3. They have strict non compete non solicitation on their PMs. In fact the platform’s anchor investors usually mandate the platform to include those terms into PMs’ contracts to protect the platform’s value, and if the PM sets up their own shop, they must let the platform take a percentage of the new shop’s equity. Whereas the US ABA bans non-compete (Rule5.6) 4. These platforms don’t always hire the PMs fully. Some platforms like Citadel and Point72 just buy strategies/signals from smaller managers (this is called ‘alpha capture’ and deploy their own capital to pursue those opportunities and split profit with those managers. That way they don’t maintain the overhead. We seldom hear BigLaw licensing some lawyer’s templates/knowhow without hiring them. 5. These platforms mostly scale by deploying capital efficiently so PMs don’t need to set up their own fund. In BigLaw, you can’t really deploy work or relationship the same way so eventually it becomes winners take all rather than fully performance based. In short, these platforms have much more durable value than BigLaw and can survive the departure of rainmaker PMs.