Hedge fund managers have two “unappetizing” choices in today’s market environment, Dmitry Balyasny, Managing Partner and Chief Investment Officer of the $12.1 billion hedge fund that bears his name wrote in the fund’s first quarter letter to investors reviewed by ValueWalk. They can slim down and focus on a niche strategy or, like Amazon.com, bulk up and build a diverse business. Balyasny Asset Management, from one perspective, appears to have chosen components of both strategies. Balyasny looks to Amazon for the hedge fund future, but will institutional investors give hedge funds the same latitude they have afforded Amazon’s Jeff Bezos?

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75% of Balyasny alpha comes from the long end of the Long / Short strategy

Balyasny appears to be growing a large and diversified hedge fund that is comprised of many noncorrelated niche strategies with a prudent if potent dose of long stock selection in his formula. On the quarter Atlas Global was higher by 1.56% while Atlas Enhanced delivered 2.51%.

As if to exemplify the fund’s future, the significant first quarter performance driver, generating 75% of alpha through the Atlas Strategy that built the firm. But 20% of returns were driven by new portfolio managers.

Meanwhile, the fund’s systematic strategy was up “small,” but performance was steady. “Good diversification across regions and frequencies helped performance, and we’re also starting to see the benefits of expanding beyond equities into systematic futures and FX,” Balyasny wrote, pointing to the addition of Dr. Ulrich Brandt-Pollmann, the fund’s new head of Systematic strategies. The Macro and directional strategies were more challenged on the month as the US was the best performing region for the fund in the first quarter, generating 80% of gains.

Jeff Bezos

Dmitry Balyasny building a conglomerate of noncorrelated strategies

One interesting component of Balyasny’s strategy to build a large hedge fund of diversified strategies might be found in the fund’s near non-existent correlation between strategies and the stock market in general.

Although correlations have grown year over year, they remain at generally low levels. The fund’s portfolio managers had a 0.02 correlation to the S&P 500 in 2016, which has moved to 0.10 in 2017. The fund did not publish correlation during crisis statistics, but it famously avoided the August 2015 market crash entirely, a defining moment.

Summing up movements in the hedge fund industry, Balyasny notes the trend for investors to search for real alpha over beta:

Investors are becoming more sophisticated at separating truly uncorrelated alpha from beta (or what looks like alpha on a daily basis but quickly becomes too correlated in any significant market turbulence). This is leading to fee model pressure as investors rightly don’t want to pay hedge fund fees for correlated returns. We are increasingly seeing the de-coupling of these streams with investors getting rid of the jumbled structures and instead selecting real alpha options for their uncorrelated buckets and buying indexes for cheap beta.

This presents both an opportunity and a challenge to the industry as the capacity for true uncorrelated, high Sharpe alpha is very limited with many of the best funds closed. Meanwhile, firms that have historically offered a correlated part-alpha/part-beta model will have to strip the pieces apart and see if there is enough alpha capacity for a viable offering.

Dmitry Balyasny Jeff Bezos Amazon
Dmitry Balyasny


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