“Nobody cares about your story until you win, so win.”

Dan Martell

Last week, the Financial Times was first to report that BlackRock, the largest overall asset manager in the world (at ~$11.5 trillion), was in early talks to buy a minority stake in Izzy Englander’s Millennium Management, one of the largest hedge funds in the world (at ~$67.9 billion as of June 30, 2024, according to Pensions and Investments – P&I). Of course, at this stage, there’s no way of knowing how this move will play out – or when. Last year, a similar partnership agreement was attempted between BlackRock and Steve Schonfeld’s Schonfeld Strategic Advisors (at ~$10.6 billion as of June 30, 2024, according to P&I) that did not reach completion…

These moves beg the question: Does this type of pairing represent a new strategic template that we could expect to be replicated? And, what – if anything – does it suggest about the state of market evolution?

Alphacution has been publishing research on the concentration and consolidation within the capital markets ecosystem for years, at least from the perspective of listed securities. For historical reference, review the following Feed posts:

Given Alphacution’s ecosystem framework that’s segmented into three “zones,” we know that structural alpha zone players – which are almost exclusively proprietary trading firms acting as market makers with hyperactive trading strategies, the largest of which being active across multiple product classes, asset classes, regions, and turnover frequencies – have been encroaching into the neighboring active management zone where mid-frequency, relative-value strategies reside – for years. On our “map,” this is equivalent to a series of moves from “west to east,” with some exceptions where the evolution has been “east to west” since launch. Citadel and Two Sigma are examples of this…

What we haven’t seen, however, is a major player in the passive management zone make a significant marquee move to the “west” – into the active management zone…

A simplified version of Alphacution’s ecosystem map and these cross-zone movements are as follows:

From our recent mega-case study on US equity option market makers, the following players are key examples of multi-zone strategy deployments under common ownership:

Outside of option players, Tower Research Capital / Latour Trading and Two Sigma Investments / Two Sigma Securities would likely be added to this list. Furthermore, based on its case study, Alphacution believes that XTX Markets is a candidate to be added to this multi-zone roster – though we have yet to confirm this type of expansion…

Returning to the potential BlackRock / Millennium partnership, there a numerous signals to choose from based on this news:

First, it’s much more likely that mergers, acquisitions, or strategic partnerships of other asset managers occur among players within the passive management zone. Given the dominance of a few players in the passive management zone – like BlackRock, Vanguard Group, State Street, or Fidelity (all of which have US equity exposures greater than $1 trillion as of March 31, 2024) – partial or total ownership of players in the neighboring active management zone – like Millennium – would not typically be seen as a strategic fit nor have enough assets under management (AUM), assuming that asset accumulation was the priority…

However, in this case, BlackRock is clearly executing a different business strategy than the other dominant players (as measured by US equity holdings). Since 2009, BlackRock has completed 35 acquisitions – large and small – across numerous sectors. This is more than State Street (9), Fidelity (6), and Vanguard (1) combined…

If BlackRock’s goal is to become some kind of one-stop-shop for investment products – as some suggest it is – then the Millennium partnership makes total sense, particularly given Millennium’s hub-and-spoke configuration – where small trading teams operated independently under a global risk overlay – which theoretically gives it strategy capacity elasticity. This is somewhat like an internalized version of the fund of funds model. Stevie Cohen’s Point72 Asset Management and Dmitry Balyasny’s Balyasny Asset Management (BAM), among many others, are prominent examples of this structure – often known as “pod shops”…

In other words, could Millennium manage significantly more assets across a spectrum of active strategies? Theoretically, yes – although note that the largest hedge fund, Bridgewater Associates, currently weighs in at $89.6 billion – so there are some upper boundaries in the realm of active management…

Secondly, many of the founders of the most prominent hedge funds are in their late-60’s or older. Just to name a few: Izzy Englander is 76. Stevie Cohen is 68, and recently announced that he was stepping away from the trading floor, according to Bloomberg. David Shaw – founder of D. E. Shaw Group – is 73. Jeff Yass – founder of Susquehanna Investment Group (SIG) – is 66. Ray Dalio – founder of Bridgewater – is 75 and has already stepped back from many of his official duties. So, does this mean that a BlackRock / Millennium strategic partnership is unique to these two players? Is this some kind of succession plan? Or does this template potentially apply to hedge funds with older founders who’d like to wind down their daily responsibilities? Or is this this the beginning of a much bigger trend that’s applicable to a much broader group of players?

Clearly, we don’t know yet – but its something worth watching…

Finally, there’s the impact on market concentration – at least, in US equities – that this partnership, and perhaps others like it, could cause. The following 5 exhibits illustrate some of those impacts, specific to a potential BlackRock / Millennium partnership and generally for the broader US equity market…

The final exhibit, below, shows the change in cumulative market capitalization share in US equities for the top 53 managers between Q2 2013 and Q1 2024. Though the cumulative share of these top 53 managers amounts to an increase of 10 points over the 11-year period, it’s fascinating to note that that figure is not the peak increase. The peak increase over this period is 13.3% and it falls within the top 9 managers. This means that concentration decreases by 3.3% for the remaining 44 players (by rank) in this sample. [Note that the top 53 managers by period are not exactly the same, but largely the same.]

In Alphacution’s recently published case study on US equity option market makers, we distinguish between analytical perspectives – like “field level,” “stadium level,” and satellite level” – for the first time. These perspectives are equivalent to analysis of individual managers, groups of managers, and all managers in the market, respectively – at least as they relate to US equities and options…

The last two exhibits, above, are examples of our new and emerging satellite view capabilities. Alphacution is currently developing a case study to showcase more of the early examples of this satellite view…

Until next time…