Why a Market Shakedown Could Leave the Biggest Pod Shops Stronger

The hook: a selloff is a sales pitch

You'd expect a market shakedown to hurt hedge funds. For the biggest 'pod shops,' it might do the opposite. These are multi-manager funds that split their money among many separate trading teams, each kept on a tight risk leash. A bad month for markets is when a fund gets to prove it can make money while everyone else is losing it. Funds that pass that test tend to attract more money afterward.

That's the argument Marc Rubinstein makes in Net Interest, and his example is an unexpected client: the State of Alaska. The point isn't who has the best month. Big pools of public money want something only a few firms can provide, and a market scare could push more of that money toward the same few names.

"If you put our absolute return numbers into the optimizer, it would say put half the portfolio in it, because we're getting CPI plus five there, totally uncorrelated." — Marcus Frampton, Alaska Permanent Fund

What happened: Alaska's hedge fund turnaround

The Alaska Permanent Fund is the closest thing America has to a sovereign wealth fund. It was built on oil royalties, now holds $88 billion, and pays for state services plus a yearly dividend to residents. This year that check is $1,200 a person. The fund first tried hedge funds in 2004 through a 'fund of funds,' which means it hired outside managers to pick hedge funds for it. It went badly. In the ten years to 2016, those investments returned 3.4% a year, had two down years, and barely cushioned market drops. On top of that, Alaska paid two layers of fees.

In 2016, under Marcus Frampton, who is now the fund's chief investment officer, Alaska started picking managers itself. It only wanted managers with a record of making money in down markets. One of its biggest bets was Millennium: $300 million in early 2019, then another $80 million at the start of 2020. To make that second investment, Alaska had to lift its own cap on how much could go to a single fund, and Millennium became its largest hedge fund holding. Getting in at all was a win. A Callan Associates adviser told the board that Millennium 'has been closed forever and then reopens periodically.'

The new approach worked. Over nine years the hedge fund portfolio returned 6.7% a year, with no down years and little connection to how markets moved. It was up about 8% in 2022, when markets slid. That's why Frampton wants more.

Why it matters: demand is unlimited, capacity isn't

Here's the core tension. Frampton says that if you put his hedge fund returns into a portfolio optimizer (software that suggests how to split up a portfolio), it 'would say put half the portfolio in it, because we're getting CPI plus five there, totally uncorrelated.' In plain English, that's inflation plus five percentage points a year, from returns that don't rise and fall with the market. Hedge funds are 8% of Alaska's portfolio today, so the appetite is far bigger than what he actually gets. The catch, he says, is that 'the good funds are capacity constrained.' Many strategies get harder to run as more money pours in.

That makes the funds that can grow without losing their edge valuable. Millennium has nearly tripled in size since Alaska came in. When an investor as large as a state fund has to wait for the door to open, and changes its own rules to get in, you can see who has the leverage. It's the fund, not the client.

A selloff sharpens the sorting. Millennium lost 2.3% in October. Rubinstein notes that was inside its risk limits and that, compared with other funds, it could have been worse. This week Bloomberg's Nishant Kumar said that in nearly 16 years of covering hedge funds he couldn't 'remember a day like today.' If Millennium beats the turmoil, Rubinstein argues, it proves Frampton right. And as Millennium keeps growing, more allocators would be able to get in. In practice, the next wave of money could go to the firm that already has the most.

The bigger picture: what it means for regular investors

You probably can't write Millennium a check. You may still be exposed through a pension, an endowment, or in Alaska's case, a dividend. Public money is increasingly being asked to earn steady returns that don't swing with stocks, and Alaska shows both sides of that. Done well, it works: no down years in nine. But the funds that do it well are scarce, so more public money relies on a short list of managers.

Three things to watch. First, Millennium's November number, which Rubinstein calls 'key.' A good month makes it easier to sell bigger allocations. Second, whether Millennium reopens to new money as it nears $100 billion. That would show it thinks it can handle more scale. Third, whether other public funds follow Alaska's playbook and pick hedge fund managers themselves. If they do, expect them to chase the same few names, which would make the biggest platforms bigger still.