(Bloomberg) -- Citadel veteran Todd Barker conveys a key message when meeting with prospective investors for his new hedge fund firm: We’re the anti-pod shop.
Freestone Grove Partners, which will debut in January with $3.5 billion in commitments, will be different from other multimanager firms, Barker and co-founding partner Daniel Morillo told clients, according to people familiar with the matter.
The firm is the latest in a flurry of new multimanager hedge funds, known in the industry as pod shops, which divvy up money across dozens or hundreds of teams with different specialties.
In launching their fund, the duo — who spent a collective two decades at Citadel — looked across the pod-shop landscape and found most have grown too big and have too many teams. That structure has pushed up costs and led firms to crowd into the same trades, they found, potentially diluting returns.
By contrast, Freestone will limit assets and have fewer pods. Each analyst will focus on a smaller universe of stocks, the people said. The pods will run more capital relative to firm assets than teams at rival firms.
Freestone is betting its structure will be cost-effective, the people said. It also hopes its so-called anti-pod shop will retain employees amid a fierce talent war among multimanager hedge fund firms.
Multimanager firms have recently faced scrutiny from investors and regulators over their use of leverage and crowded trades, which could pose problems if giant funds sell en masse.
Barker and San Francisco-based Freestone declined to comment.
Freestone will take a human- and computer-driven approach to trading stocks across six sectors. Morillo — who has a background in quantitative strategies — created a statistical model to optimize Freestone’s staff, trades and asset size. The firm will limit its investment teams to 20 or fewer, since the model, known internally as “Dan’s math,” found any more teams than that would hinder returns.
Each pod will run about $2 billion including leverage, and have three to four risk-takers — industry parlance for analysts and portfolio managers who make investments. Employing more than 60 risk-takers results in too much overlap of talent and trades, the model found.
Freestone will be similar to Citadel’s stock-picking business, Surveyor Capital, which Barker ran for five years. It will allow pods to share and synthesize information. And, like Surveyor, firm management will closely monitor trades and adjust for factors such as traders’ biases.
Citadel tapped Barker to lead Surveyor in 2016 after the unit lost money, and he made changes there that mirror how he’s structuring Freestone. At Surveyor, Barker cut staff, consolidated teams and gave each pod more capital to invest.
The firm has 90 employees, two-thirds of whom are investment staff. Its half-dozen sector heads consist mostly of former Citadel employees.
Freestone’s chief risk officer is Nancy Cheung, who was head of risk for equities at Citadel for three years, and later ran risk management for Brookfield Asset Management’s now-shuttered multistrategy hedge fund platform, according to her Linkedin page.
Former Surveyor portfolio manager Ravi Paidipaty is deputy chief investment officer, while Naozer Dadachanji, who co-founded advisory firm CamberView Partners, is chief operating officer. The firm’s head of technology is Mike Tucker, the former chief technology officer at Teza Technologies.
Morillo was Citadel’s head of equity quantitative research. After leaving in 2021, he spent two years as chief investment officer at Opendoor Technologies Inc. At Freestone he oversees the firm’s quant strategies.
Barker, Freestone’s CIO, started at Citadel in 2004 and later co-ran its Global Equities business before taking the helm at Surveyor. He left in 2021.
Freestone plans to cap assets at $10 billion and will return profits to investors if it gets bigger. It has two anchor investors, a sovereign wealth fund and university endowment, which received preferential fees. The firm didn’t offer fee discounts to any other investors. The firm will draw down capital over six months and then lock up investor cash for two years, after which it will take clients a year to get all of their money back. That’s a shorter period of time than many other multimanagers, which tie up capital for several years.
Freestone isn’t the only ex-Citadel fund to run with fewer teams than typical multimanager funds. Brandon Haley’s Holocene Advisors and Woodline Partners, run by Michael Rockefeller and Karl Kroeker, use a similar strategy.
(Updates with more details on multimanager funds in third paragraph. A previous version of this story corrected the spelling of firm’s deputy chief investment officer in the 14th paragraph.)
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