Allocators that crowded into the biggest hedge funds are worried about these managers crowding into the same trades

• The biggest worry for allocators to hedge funds is crowding, a new Bank of America survey found.
• But the survey also found that allocators' own portfolios of managers had become more concentrated.
• Multimanager funds, which have grown tremendously but face pressure from LPs over costs, remain popular.

Allocators are growing more worried about crowding at hedge funds. But these same investors are increasingly concentrating their portfolios into the same few megafirms, a new Bank of America survey of allocators found.

The survey — of 160 allocators with roughly $680 billion invested in about 4,300 hedge funds globally — found that the biggest hedge-fund managers in the industry were still gobbling assets and market share despite their investors bickering about costs.

"Respondents have generally moved towards fund consolidation rather than diversification within their HF portfolio," the report said.

"Anecdotally, we are hearing 'one in, two out' (i.e., 1 new allocation per 2 full redemptions) as the new normal," it added.

The result is the biggest are getting bigger.

Only $7 billion in net inflows went into the entire $4.3 trillion industry in the first half of 2024, and multistrategy hedge funds like Millennium and Citadel led the way. This flavor of hedge fund brought in $10 billion in net flows in 2024's first six months, and the average multimanager firm runs $1.7 billion.

By comparison, the average hedge fund overall runs $528 million.

Despite this, allocators, paradoxically, have grown even more concerned about crowding risks in their hedge-fund portfolios. According to Bank of America, half of respondents said that "crowding" would be their top concern as they closed out the year.

While one of the selling points for multimanager funds is their broad reach across markets, geographies, and asset classes, these firms have proved to move in lockstep in volatile markets over the years — or chase after a hot area that one firm has found.

For example, when the pandemic sent markets spiraling in early 2020, many of these firms lost money on the basis trade, a type of relative-value bet that seeks to take advantage of price differences between similar securities. In the years since, concentration in this trade and the leverage these managers use to juice their returns have gotten the attention of regulators.

Limited partners have finally regained a bit of leverage over these multimanager funds, some of which have struggled to outperform the risk-free rate since interest rates increased. Bank of America said that fee hurdles were becoming more common — 42% of respondents reported some sort of hurdle for at least one of the funds in their portfolio — amid a "buyers' market."

"Asset raising remains challenging for most managers," the survey said, adding that should lead to "increasing manager/allocator alignment."