• Index-rebalance was one of the hottest hedge fund strategies in recent years. 
  • Performance in the strategy is in the midst of prolonged drought, including a blowup last June.
  • Resignations and liquidations have hit funds including Citadel, Balyasny, Millennium, and Point72.

Heavyweight multi-strategy hedge funds aren't known for their patience. Quickly cutting bait on portfolio managers and strategies that aren't performing is part of the business model. 

It seems their patience has run out on the index-rebalance strategy, one of the most popular and sought-after hedge fund moneymakers in recent years. A performance drought in the trade — which involves betting on the stocks added and deleted from indexes like the Russell 3000 and the S&P 500, often with quantitative techniques — has yielded a trail of resignations and liquidations this year at funds that only two years ago were fighting to poach the strategy's top performers, including Millennium, Citadel, Point72, and Balyasny. 

The resignation of Steve Chao at Cubist Systematic Strategies, Point72's quant-trading platform, is among the most recent departures, according to people familiar with the matter. 

Two marquee Citadel PMs involved in the strategy are gone. Earlier this year, Ryan Sandor, one of the sector's most significant hires in 2021, resigned from the fund, citing personal reasons, according to people familiar with the matter. More recently, Paul Jefferys, who ran the central risk book at UBS before joining Citadel in 2017, left the fund. 

At $58 billion Millennium Management, the top firm in index-arbitrage, several PMs have departed. The most recent, according to people familiar with the matter, was Gabriela Baez, another significant hire in 2021 from Barclays.

Representatives for the hedge funds declined to comment or did not respond to requests for comment. 

"It's not a secret that these trades were really crowded in last year and a half or so," one PM in the strategy said. "It's been a difficult environment."

Other departures in the strategy this year include:

Name Fund
Manik Lather Balyasny
Bret Chesney Balyasny
Tobias Cooper BlueCrest
Paul Jefferys Citadel
Ryan Sandor Citadel
Gabriela Baez Millennium
Richard Cheung Millennium
Steve Manzoni Millennium
Peter Massaro Millennium
Steve Chao Point72/Cubist Systematic Strategies
Victor Morange Schonfeld

The strategy has dried up

"It's just pod after pod after pod," one headhunter involved in the space said. "These multi-strats, especially the bigger ones, they lose patience." 

In that context, the turnover is understandable, given the strategy's sustained dry spell. Index arbitrage was a gusher for several years leading up to 2020, especially at Millennium. But returns ebb and flow, and people involved in the strategy say it peaked around the end of 2021. Amid the competition to carve out a slice of the strategy's riches, the space became crowded and returns started to drag.

"The strategy had a phenomenal few years," one PM said, noting the recent decline in performance that has carried into 2023. 

Last year was a struggle, especially amid a blowup in June connected to the Russell 3000's annual reconstitution. A number of PMs and teams hit drawdown limits and were liquidated in the aftermath. Unwinding these books, which can have billions in notional exposure, has knock-on effects, adding another wrinkle for teams trying to predict an index's trajectory.

"When liquidations happen, you kind of see a capitulation effect. One domino pushing over the other dominoes,"  another PM said. 

"It's such an X factor you have no control over," the headhunter said. "That also makes it harder to trade the strategy."

This year the strategy has been flat to slightly down in aggregate through April, two portfolio managers told Insider. The PMs cut this year haven't necessarily hit drawdown limits or suffered dramatic losses. Still, they've been unable to generate returns sufficient to escape the impatience of multi-managers eager to allocate to more bullish areas of the market. 

"What we've been seeing lately, returns in the space have decayed," said one of the PMs, and as a result "a number of firms decreased exposure to the space."

"Flat doesn't bring a negative number back to positive," the PM added. 

While hedge funds are allocating their capital elsewhere, they haven't given up on index-rebalance trading. Millennium is still home to the white whale of the strategy, Glen Scheinberg's pod "SRBL," as well as a team in Dubai run by Pratik Madhvani, another major player. 

The SRBL squad, which is said to be 15 to 20 strong, wasn't immune from losses last year, but it has continued to trade at Millennium. 

But given the now lengthy performance struggles, index-rebalance trading may have hit its nadir.

"I'm calling the bottom here. It can't get much worse than this," the headhunter said. 

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