• Dmitry Balyasny is changing his systematic-investing team, sources told Business Insider, and the first big move is the departure of its head, Ulrich Brandt-Pollmann.
• Brandt-Pollmann had been with the $6 billion hedge fund for a little over two years and moved to the US this year after working in Balyasny's London office.
• The fund, which had to cut roughly a fifth of its staff at the end of last year because of poor performance, has had a solid 2019, returning 10.22% through the end of July and hiring 14 new portfolio managers, sources said.
• Click here for more BI Prime stories.

Despite a bounce-back performance in 2019, Balyasny Asset Management is revamping its quant team, and its head of systematic strategies, Ulrich Brandt-Pollmann, is leaving the firm.

The $6 billion hedge fund made the move this week, sources told Business Insider, and there is the potential for more movement on the team.

The firm hired Brandt-Pollmann from Credit Suisse in mid-2017 and moved him from its London office to the US this year. Previously, Brandt-Pollmann, who went to school in Germany, worked as a quant trader for Morgan Stanley, the former high-frequency trading shop Getco, and UBS.

The firm and Brandt-Pollmann declined to comment.

See more:Humans are beating machines, and Pershing Square and Greenlight are crushing it. Here's how hedge funds performed in the first half.

The move is surprising, as Balyasny seemed to have found its footing after a difficult 2018 that ended with the firm laying off a fifth of its staff. Balyasny's fund is up 10.22% through the end of July, besting the average hedge fund, which is up roughly 8%, according to Hedge Fund Research.

The firm has also hired 14 new portfolio managers this year, sources close to the firm said, as well as dozens of new analysts.

The quant team earlier this year lost Paul Chambers, who co-led the equity strategy within the systematic team with Brandt-Pollmann. Chambers returned to his previous firm, Man Group, Business Insider previously reported.

See more:A new machine-learning tool used by hedge funds to rank their brokers hopes to put an end to the 'old boys network'

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NOW WATCH: The US women's national team dominates soccer, but here's why the US men's team sucks

• The billionaire Steven Schonfeld's hedge fund was quick to adopt algo-trading strategies and now has 75 portfolio managers across the world.
• Schonfeld Strategic Advisors has been open to outside capital for just over three years and has bold aspirations — its chief investment officer says the goal is to be the premier equities hedge fund in the world.
• The firm keeps to its roots, though, with 50 old-school traders still working in Long Island, roughly half of whom have been with the firm for more than 15 years.
• Click here for more BI Prime stories.

Schonfeld Strategic Advisors, the hedge fund that grew out of the fortune of the billionaire trader Steven Schonfeld, has seemingly bold aspirations given that it has been open to outside investors for just three years.

"Our goal is to be the premier equities hedge fund globally," Ryan Tolkin, Schonfeld's chief investment officer, said in an interview with Business Insider at the firm's midtown Manhattan office.

A lofty target — but the firm's ambitions might not be as much of a reach as they sound. It has been steadily adding strategies over the years, enjoys stable financial backing from its founder, and has demonstrated an ability to navigate change in the past.

Schonfeld, known in the 1980s for using legions of Long Island-based traders to essentially do quant trading by hand, now has 75 hedge-fund portfolio managers across the world who employ event-driven equity, quant, and discretionary long-short strategies, with $2.6 billion in outside assets.

See more:Billionaire Steven Schonfeld poaches a top quant from Glenn Dubin's Engineers Gate to run a new fund

And the firm once described in a 2009 Wall Street Journal article as part of "Wall Street's B-List" is outperforming many of its better-known peers in Chicago, Greenwich, and Stamford, posting a 16% return last year when many funds lost money.

With solid performance and consistent backing from its namesake, Schonfeld might be one of the most stable hedge funds in the game right now.

This year, sources say, the firm's flagship is up nearly 10% through July, besting the average hedge fund. The firm declined to comment about its performance.

The right moves at the right time

Schonfeld started trading more than 30 years ago, and he got rich with short-term trades that he'd often get out of in a day or so. He built his wealth to the point where he was able to hire as many as 1,100 traders at Schonfeld Group's headquarters in Long Island to work the same kind of strategy.

That labor-intensive approach made him a billionaire, but Schonfeld was also quick to adapt to the sea change that many stock-picking hedge-fund managers are still struggling with: the move to quantitative, computer-driven strategies.

Andrew Fishman, the firm's president since 2000, called Schonfeld "one of the great natural statisticians" and said that helped him be more flexible with his approach.

"Math has always been one of the elements that has defined us, and Steve kept up with what was the latest and greatest coming down the pipe," Fishman said.

See more:Humans are beating machines, and Pershing Square and Greenlight are crushing it. Here's how hedge funds performed in the first half.

The result was a statistical-arbitrage fund launch in 2007 that's now the biggest product at the firm and has 22 portfolio-manager teams in the US, Europe, and Asia. While the firm had made its name by executing trades relatively quickly, stat-arb funds took Schonfeld and others' human-run strategies and supercharged them, with positions sometimes bought into and sold out of in a matter of seconds.

The financial crisis helped the firm grow its nascent strategy quicker than expected as Wall Street and other hedge funds hit hard pushed talented people to the street, Fishman said. Regulations on banks' ability to trade on their own accounts created a surplus of investors in the job market.

"In some ways, we were able to get a jump-start on the talent scene," he said.

The stat-arb fund now makes up 50% to 60% of the risk the firm takes. A discretionary stock-picking fund, which was launched in 2012 and has 37 portfolio managers, assumes 25% to 35% of the firm's risk. An event-driven equity strategy assumes the rest of the firm's risk, except for roughly 3% still run by a group of 50 traders in Long Island.

The goal of the collection of strategies is to cover every part of the stock on every time horizon, Tolkin said.

"Try to make as many different bets across stocks as possible," he said. "You make an overall portfolio that combines different market environments."

This build-up led to the opening of the multistrategy hedge fund to outside investors under the name Schonfeld Strategic Advisors right as investors were moving away from single-manager, single-strategy funds. Schonfeld himself had stepped away from the day-to-day operations of the firm before the funds opened to outside investors.

Fishman said the firm benefited from the movement of large institutions away from fund-of-funds and into managers that blend several different strategies.

A patient short-term trader

The reality is that while the timing of many of Schonfeld's moves might have been right, the firm still needed to add quality people to execute the vision.

The firm "became a place people want to come" to, Tolkin said, because of several factors. The first is the stability offered by the capital invested in the funds and business by Steven Schonfeld. But another big one, Fishman said, is the "patient approach that has always been a part of our DNA" when dealing with investment staff.

"It's one of the things that has really separated us then and now," Fishman said.

The reality is that not every portfolio manager is going to crank out returns all the time, Tolkin said. But the firm believes that catering to its portfolio managers' needs — whether it's for data, technology, additional analysts, or more — is a better approach than firing.

"Some of our most successful PMs would have been fired by our competitors because they initially struggled," Tolkin said.

See more:Former Bain & Co. and Sagard Capital partners are launching a small-cap-focused hedge fund

The patience can be seen with the remaining traders still working on Long Island, roughly half of whom have been with the firm for more than 15 years and are now personally invested in the hedge fund, Fishman said.

"It's a differentiator, this history and this culture," Fishman said.

Last year, the firm hired 38 investment professionals, and it has added some big names this year, including two former BlueCrest Capital PMs, Alex Codrington and Russell Hartley, and one of Glenn Dubin's top quants, Ricky Shi. Codrington and Hartley started up the London office, and the firm's plans to expand internationally include merging with Folger Hill, retaining a majority of the manager's investment teams in Europe and Asia.

The firm's success in building a business has also attracted competitors to come after some the architects of the young hedge fund. Schonfeld sued Michael Gelband's ExodusPoint last year after it poached Alessandra Sassun, the head of human capital, Valmiki Prasad, the head of execution research, and Gregoire Vidal, the head of business development for quantitative strategies.

ExodusPoint countersued Schonfeld, saying the hedge fund "systematically under-compensated employees," and in April a judge denied an injunction request from Schonfeld that would have stopped Sassun and Prasad from contacting people they worked with at Schonfeld.

Schonfeld and ExodusPoint declined to comment on the lawsuit.

A focus abroad

The next step in the firm's ambitions for global domination is its expansion into overseas markets, where it hopes 30% to 35% of its risk will be soon.

The belief is that there's alpha to be mined from international markets, especially compared with the US, Tolkin said.

But the firm does not want to grow for growth's sake alone, Fishman said.

"I don't think you have to continue to scale to get the advantages of scale — at a certain point there is diminishing returns," he said, adding, "We're not going to hire a US consumer group that's doing the same thing our current US consumer group is doing, just for the sake of growing."

See more:The hedge-fund industry has a problem with managers cherry-picking performance. 1 group wants to stop that.

The expansion will be into areas and equities the firm doesn't have exposure to right now, but without a huge rush to get there. Fishman said he knows the manager has a good base to work from, with decades of proprietary trading data, technology infrastructure, and Schonfeld's capital and reputation, as well as the current "luxury of good performance" that makes it easier to be selective with expansion plans and additional investors.

"We want people that understand our business, " he said of prospective investors.

"You can be consistent with your objectives."

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• Dmitry Balyasny's hedge fund has cut its 10-person Synthesis team, which uses a mix of quant and fundamental stock-picking techniques and ran a $2 billion book of business, sources tell Business Insider.
• Synthesis team leader Mike Daylamani is among the cuts - he joined Balyasny in 2018 after spending nearly a decade working for Steve Cohen. 
• Sources say the cuts are unrelated to a strategy revamp at the firm's quant unit — which lost its head, Ulrich Brandt-Pollmann, last week. 
• Click here for more BI Prime stories.

It's only been about a year since Balyansy launched its Synthesis team, but it is already cutting the "quantamental" group, which combined quant and fundamental equity-picking strategies. 

The group was run by Mike Daylamani, who was recruited from Steve Cohen's Point72 last year to head the group. He had nine sector heads underneath him, all of whom were cut this week, sources tell Business Insider.

The sector heads were: Philson Yim; Ed Duggan; Jason Lee; Zach Schmidt; Ryan Molloy; Sudhir Sachdev; Dan Riff; Eugene Lipovetsky; and Andrew Schiffrin. All were recruited to Balyasny roughly a year ago from firms like Caxton Associates, Citadel, Luminus Management, Wellington, and Point72. 

Sources say the team ran a $2 billion book of business, and the cuts come less than a week after word spread that Balyasny's quant head, Ulrich Brandt-Pollmann, was leaving the $6 billion hedge fund amid a quant strategy revamp. 

See more: Balyasny's quant head is out as the $6 billion hedge fund undergoes a strategy revamp 

The Synthesis line was not connected to the revamp to the quant strategy, sources close to the firm say, and the cuts were made because the group's performance was poor. 

The firm declined to comment. Daylamani could not be reached for comment. 

Balyasny's hedge fund has bounced back after a rough 2018, when the manager cut a fifth of its staff and Balyasny himself closed his long-running "Best Ideas" portfolio. The hedge fund is up 10.2% in 2019 through the end of July, and the firm has hired in other areas of the business, adding 14 new portfolio managers. 

See more: A new machine-learning tool used by hedge funds to rank their brokers hopes to put an end to the 'old boys network'

Join the conversation about this story »

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• Launching a hedge fund in 2019 hasn't been easy, and several people who are either raising capital or have recently launched gave us an inside look at the process. 
• More funds have been liquidated instead of launching, and even the biggest funds are struggling to keep assets right now.
• "General long-short equity can kind of be almost a dirty word," one person told Business Insider, and new launches are better off with differentiated strategies that can help them stand out from the pack. 
• For more BI Prime stories, click here.

Several people warned Greg Royce about the "rule of three" when he said he was planning to launch his own fund.

"It would take three times as long, and be three times harder than you originally thought, to raise a third of the capital you want," said the former SAC Capital, Visium, and Citadel portfolio manager.

Royce is planning to launch Maximus Long Short Equity Management in a managed account structure next month. That's a tough undertaking in the best of times, but even more daunting given hedge fund closures have been outpacing openings and startup costs are rising. More people may be looking to  "seeders," which provide a majority of start-up capital in exchange for a chunk of revenue once a fund gets going.  

"It takes certainly a lot of hard work and persistence, and staying in front of people," Royce said.

"I certainly don't have all the answers."

See more: Humans are beating machines, and Pershing Square and Greenlight are crushing it. Here's how hedge funds performed in the first half.

For three straight quarters starting mid-2018, more funds have liquidated than launched, according to the latest data from Hedge Fund Research.

And investors are even leaving the most established funds, according to research from the law firm Seward & Kissel, which found 46% of the largest 200 hedge fund managers' assets experienced "material decline" when comparing their 2018 assets to the prior year's.

Investors lost even more confidence after 2018, when the average fund lost money, and big investors like Stanley Druckenmiller have called for an industry-wide culling of funds. 

Hopeful hedge fund managers also have a higher bar to clear just to start, thanks to increased costs for technology, data, compliance, and more.

In a blog post on choosing third-party service providers for new hedge funds, Eric Christofferson, a managing director at cloud software provider SS&C, wrote that "the expression 'two guys in a garage with a Bloomberg terminal' can hardly ever apply to any start-ups today."

"Starting a hedge fund these days isn't just about raising capital and running trades," Christofferson wrote. 

That rang true for one person currently in the fundraising process that spoke with Business Insider who asked not to be named because their backer does not want them to speak with the media before launch. They said "you underestimate the amount of time it takes" to complete the "business aspects" of starting a fund, like hiring, filling out proper paperwork, and meeting with potential investors.

This year also hasn't seen the mega-launches of 2018, when Michael Gelband, Daniel Sundheim, and Steve Cohen started multi-billion-dollar funds. The biggest launch so far has been $2 billion Woodline Partners, from former Citadel PMs Mike Rockefeller and Karl Kroeker. Another big one expected this year is a $600 million systematic fund by one of Cohen's former quants, Michael Graves, with its primary backing from Paloma Partners, which also seeded DE Shaw. 

See more: Former Bain & Co. and Sagard Capital partners are launching a small-cap-focused hedge fund

Still, a second person who recently launched a fund told Business Insider there's appetite out there for strategies that stand out from the crowd.

"General long-short equity can kind of be almost a dirty word," said this person, who asked not to be named because their fund still may raise more capital. A recent report from Jefferies prime brokerage division found that only a quarter of new launches focused on equities over the last three years have been generalists, with most focusing on industries like healthcare and energy. 

The toughest period is before you hit $50 million to $100 million, the person said — that's when you feel like you might have made a mistake.

This fear might be contributing to the growth recent launchers have noticed in seeders, like Blackstone, Paloma and Lighthouse, that will give substantial capital to a fund in exchange for a piece of their business and revenue going forward.

See more: Meet the 5 rising stars presenting their investment ideas at the world's highest-profile hedge-fund conference

"It's a different kind of alignment with investors," said Robert Mirsky, head of EisnerAmper's asset management division, about seeding, but overall, he sees it as a positive. 

"I'm willing to give up a lot to get that first big investment through the door." 

That would free up time for the aspiring managers to do the thing they want to do: invest. One person who recently launched said if they could do it differently, they would have less meetings with potential investors because it took away from the time needed to research and continuously update their strategy. 

Because, in the end, it's the track record that matters the most, Royce said.

While fancy lawyers and sparkling new tech are good selling points, "it's almost imperative" to have a good track record, he said.

"It's a data-driven business so to any extent you can report performance numbers, the better," he said. 

Join the conversation about this story »

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• Big name hedge funds bought up big Uber stakes during or shortly after the company's initial public offering in May, regulatory filings disclosed this week show. 
• Lyft, meanwhile, saw many managers trim their stakes. 
• Both stocks have sank considerably during their brief time on public exchanges. 
• Visit Business Insider's homepage for more stories.

Some of the world's largest hedge funds snapped up shares of Uber in the second-quarter following the ride-hailing giant's initial public offering.

But investment managers weren't feeling as optimistic about the company's biggest competitor, Lyft, in the second quarter, regulatory filings show.

Hedge funds are required to disclose their stakes in public companies four times a year, following the close of each quarter. Because Lyft went public at the very end of the first quarter, its likely that the funds interested in the stock bought in then, and already disclosed the holdings in April.

Still, no positions in Lyft were drastically increased in the second quarter by big league managers while Uber saw plenty of activity.

Viking Global Investors, a Connecticut-based fund with roughly $34 billion in assets under management, was one of the largest buyers in the quarter. The fund bought 13.37 million shares of Uber worth about $620 million, according to regulatory filings. It owns no shares of Lyft.

Read more:Uber's top lawyer reveals how the CEO convinced him to join the company he'd previously said he would avoid

Citadel Advisers, the $30 billion Chicago-based fund managed by Ken Griffin, also bought 7.08 million shares of Uber, worth $215.7 million at today's prices, according to regulatory filings. The fund also owns about 3.2 million shares of Lyft, worth roughly $171 million at Thursday's prices.

Tiger Global Management got in too. The Julian Robertson founded fund snapped up 6.6 million shares of Uber worth $309 million in the second quarter, filings show.

Other funds bought up plenty of smaller stakes. Stanley Druckenmiller's Duquense Family Office bought 2.69 million shares of Uber, worth $124.8 million, its filings show, while D.E. Shaw bought 512,587 shares of Uber worth $17.3 million at today's prices, according to its Form 13F filed Wednesday. The fund also owns 1.7 million shares of Lyft, worth about $90 million.

Lyft, however, saw many funds trim their positions as the stock fell about 30% from its initial trading prices.

Eminence Capital, a smaller fund with roughly $8 billion under management, meanwhile, exited its Lyft position, selling 830,000 shares — worth $in the second quarter. Overall, 138 funds closed or reduced their Lyft positions in the quarter, while 193 added to or created new stakes in the company, According to Whale Wisdom.

In total, hedge funds trimmed their shares of Lyft by about 11%.

More ride-hailing news: 

• Uber's top lawyer reveals how the CEO convinced him to join the company he'd previously said he would avoid
• Uber spent over $200,000 on balloons — now its CEO is getting rid of them to cut costs as nervous engineers worry about layoffs

SEE ALSO: An early Uber investor says the company's new leaders have 'lost their mojo' — but can still beat Lyft in the long run

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• Hedge funds scooped up more shares of General Electric in the second quarter than any other company in the industrial sector. 
• The funds were most likely trying to buy the dip as the stock has shed more than 60% of its market value over the last two years.
• It's possible some of these funds sold shares before GE's sell-off on Thursday sparked by Harry Markopolos's fraud accusations, but many likely still held the stock and took a hit. 
• Here are nine hedge funds that may have gotten clobbered when GE plunged on Thursday. 
• Visit the Markets Insider homepage for more stories.

General Electric was the favorite industrial-sector pick for hedge funds in the second quarter.

According to regulatory filings, hedge funds added more shares of GE to their portfolios than any other company in the industry during the second quarter. Holdings of GE within hedge fund portfolios rose by 25% during the period, according data compiled by Bloomberg. 

The funds most likely saw GE as a bargain at its current price. Through a series of executive shakeups, layoffs, and a major overhaul of its core businesses, GE has lost more than 60% of its market value over the last two years. 

Hedge funds are required to disclose investments in public companies four times a year, following the end of each quarter. The recent filings reflect hedge fund's holdings as of June 30, so its possible some firms might have sold shares before GE's stock price tanked on Thursday.

The sell-off — which saw GE shares tumble as much as 14%— came after the famous Madoff whistleblower Harry Markopolos accused the industrial conglomerate of accounting fraud. He did so in the form of a 175-page report that claimed fraud mostly coming from GE's long-term-care insurance business.

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Its likely that many of the hedge funds that stocked up on GE in the second quarter still held their shares when Markopolos's report was published. 

The company's stock price recovered on Friday, climbing 6.5% after Larry Culp, GE's chief executive officer, purchased $2 million worth of stock and publicly rebuked Markopolos's claims. 

Here's which hedge funds likely took a beating during GE's sell-off on August 15. They're listed in increasing order of how many shares they added to positions:

9. Hotchkis and Wiley Capital Management

Shares purchased in Q2: 3,376,390

Total position: 92,562,627

Total ownership percentage: 1.06%

Market value:$791 million 

Source: Bloomberg

8. Geode Capital Management

Shares purchased in Q2: 4,595,928

Total position: 113,366,953

Total ownership percentage: 1.30% 

Market value: $969 million 

Source: Bloomberg

7. SG Americas Securities

Shares purchased in Q2: 4,614,125

Total position: 5,364,009

Total ownership percentage: 0.06%

Market value: $45 million

Source: Bloomberg

6. DE Shaw

Shares purchased in Q2: 5,298,374

Total position: 8,976,685

Total ownership percentage: 0.10%

Market value: $76 million 

Source: Bloomberg

5. DZ Bank

Shares purchased in Q2: 5,910,982

Total position: 14,174,710

Total ownership percentage: 0.16%

Market value: $121 million

Source: Bloomberg

4. Causeway Capital Management

Shares purchased in Q2: 6,980,327

Total position: 6,980,327

Total ownership percentage: 0.08%

Market value: $59 million 

Source: Bloomberg

3. Citadel Advisors

Shares purchased in Q2: 7,772,741

Total position: 11,317,046

Total ownership percentage: 0.13%

Market value: $96 million

Source: Bloomberg

2. Eagle Capital Management

Shares purchased in Q2: 24,684,128

Total position: 81,522,014

Total ownership percentage: 0.93%

Market value: $697 million

Source: Bloomberg

1. Renaissance Technologies

Shares purchased in Q2: 38,260,700

Total position: 53,270,354

Total ownership percentage: 0.61%

Market value: $455 million

Source: Bloomberg

• The hedge fund game is dominated by big players, and it can be tough for true innovators to carve out a niche. Here are eight people making their mark with new twists on fees, data, ESG investing, and more.
• Investors have questioned the hedge fund industry's high fees and recent lackluster performance — which has helped make the case for new ideas more compelling. 
• Click here for more BI Prime stories.

The hedge fund industry is often slow to embrace change.

Sure, funds start and close every year, and managers tweak investment strategies and fee structures, but many have been sticking to the same basic approaches for decades. 

We found eight people who are actively trying to change things up when it comes to data, fees, sustainable investments and more.

They work at places like JPMorgan, APG Asset Management, and Acadian Asset Management, among others. Some have been at their mission for years while others are just starting out, but all of them are doing something that turns conventional thinking in the hedge fund space on its head. 

Jim Carney, CEO of Parplus Partners

One of the defining traits of hedge funds is their high fees. 

While the industry has been moving away from the once-common 2% management fee and 20% performance fee, hedge funds still stand out at a time when fees on retail investor-geared products are in a race to the bottom. 

Parplus Partners, a New York-based volatility trading hedge fund, has come up with a different model. Jim Carney's fund trades volatility options and holds cheap S&P 500 index funds, and collects performance fees of 33% only if it outperforms the market.

"I wanted to have our interests aligned with investors," Carney told Business Insider. Carney launched Parplus in 2017 with seed capital from his former employer Ronin Capital, and has made a name for his fund thanks to the fee structure. 

After starting with just $13 million, Parplus has more than $120 million in assets now, and the fund finished 2018 up 78%, according to a factsheet. 

Management fees, Carney says, encourage funds to go out and raise a lot of money instead of focusing on actually managing it. 

"We want to use investor money in the most efficient way," he said. 

Parplus currently runs one fund, which trades options on the stock market's volatility, but is planning to roll out a fixed-income fund as well, which will have similar performance hurdles. 

Basil Qunibi, CEO of Atom Investors

Turning a data company into a hedge fund isn't always easy. 

Financial Risk Management and CargoMetrics Technologies have had success transforming into hedge funds. 

But there's also the case of Incapture Technologies — backed by former Barclays CEO Bob Diamond — which flamed out after a year amid investor worries about Incapture selling its proprietary technology to competitors.

But Atom Investors is different, mainly because its founder Basil Qunibi, who also started data company Novus, has always wanted to be in the hedge fund game. 

Hearing Paul Tudor Jones and John Griffin speak at his alma mater, University of Virginia, helped fuel Qunibi's interest in the industry, he has said, but after a stint at Merrill Lynch he didn't find many funds that would hire him. 

"I interviewed at a lot of hedge funds, I didn't get a lot of offers," he said on Ted Seides' Capital Allocators podcast last year.

Qunibi instead made his way into the industry from the investor side, working for a fund-of-funds that used to be a part of BNY Mellon, which was where he started developing the basis for Atom. 

Novus was created "a little bit out of frustration," Qunibi said on the podcast, because he noticed that investors were not doing deep analysis when picking hedge funds.

"It was a big surprise to me to see that fundamental analysis not incorporated into the selection of investment managers," he said. 

Qunibi said on the podcast that Novus' big value to allocator clients is helping them understand underlying skillsets of managers.

Austin, Texas-based Atom now uses analytics from Novus to evaluate portfolios and make allocations to hedge funds, and is running more than $1 billion after launching last year. 

Atom started by investing in 20 hedge fund managers through separately managed accounts, and according to a media report, pledged $200 million to short-selling start-up fund Orso Partners this summer. 

Jamie Kramer, head of alternatives solutions group at JPMorgan

Hedge funds have been looking more at ESG ratings when evaluating investments. And now, thanks to one person, they're also paying attention to how their own business stacks up. 

"When we first started asking 'Does the manager have an ESG policy?' we got people saying 'Do we have a what?'" said Jamie Kramer, head of JPMorgan's alternative solutions platform. 

JPMorgan's platform works with roughly 100 hedge funds that clients can use to build portfolios, and it started tracking ESG metrics on the managers in early 2018. 

At the time, only four hedge funds on the platform had a formal ESG plan for their own businesses, Kramer said. 

Now, with the help of Kramer and her team, roughly half of the managers do, and JPMorgan hopes that will hit 75% in the next year.

To Kramer, it's a no-brainer for hedge funds, which are already tracking every other type of performance metric.

"It's being aware of what of the nonfinancial will eventually drive financials," she said.

"Once you measure something, people are going to pay attention to it," she added. 

JPMorgan last year also began tracking diversity at hedge fund managers when evaluating whether they should be added to the platform, running the stats to see which ones had a significant owner or prominent investor that is a person of color or a woman.

Of the invested capital in the funds on the JPMorgan platform, 38% is with women- and minority-led managers, and a quarter of the managers are women- or minority-led.

In contrast, women and minority-owned hedge funds control less than 1% of industry AUM and represent only 13.5% of firms, according to the Knight Foundation.

Michael Weinberg, head of hedge funds and alternative alpha at APG

In the hedge fund world, artificial intelligence and machine-learning are talked about more than they are actually used.

Funds that rely solely on those technologies to trade represent only a fraction of the industry's assets, and investors often have a hard time understanding the strategies.

But Michael Weinberg is not all talk — he's making investments in funds that are actually using the tech and has been one of the biggest drivers of bringing AI to the hedge fund game. 

Weinberg, head of hedge funds and alternative alpha at APG Asset Management, was a research contributor on the World Economic Forum's paper on AI, which described it as a key part of a "fourth industrial revolution." He also helped found the Artificial Intelligence Finance Institute, where he is now on the advisory board. 

Weinberg, the former CIO for the late Jeffrey Tarrant's Protege Partners and MOV 37, believes that the application of AI to finance and hedge funds is still in the first inning, but will rapidly grow once more people become comfortable with it. The most recent wave of investors using these techniques are more willing to share their processes, he said.

"Smaller and emerging managers are often quite transparent with non-disclosure or confidentiality agreements because they have to be if they are to attract investors, raise assets and grow their funds and businesses," he said. 

These funds will be able to look at "5,000 stocks constantly, with 10,000 data points for each company," he said. 

"They're doing it faster, cheaper, and more efficiently,"he said, and it will only be a matter of time until they are as common as the algorithmic trading funds that currently dominate the market. 

Clay Gardner, co-founder of Titan

Titan co-founder Clay Gardner wants even the smallest investors to be able to trade like a big hedge fund.

Gardner, Joe Percoco and Max Bernardy had all worked at hedge funds on either the operations or investment side before launching Titan in 2018.  The company offers robo advisor-esque, 20-stock portfolios based on public filings of top hedge fund's holdings. 

"It was sort of an aspirational concept," Gardner told Business Insider.

"Everyone can invest like one of these titans." 

Titan Invest has a minimum investment of only $500, and has attracted $30 million in AUM from roughly 6,000 users, Gardner said. 

Gardner worked for Tom Steyer's Farallon and the Blackstone-backed Carbonado Capital as an analyst and investor.

"For the types of funds we worked at, the filings were really a fantastic look into a portfolio," Gardner said.

"You could replicate that without the high cost," he said.

See more: Lone Pine Capital stock-pickers explain why they're investing in Tiffany and Nintendo and how they value 'disruptors' like Beyond Meat

The goal for the team is to eventually replicate all of the complex hedge fund strategies for the average investor, a dream that Gardner admits will be complicated compared to scraping 13-F filings. 

"Fast forward 10 years, and we want our retail investors to be able to invest across all asset classes."

Carson Block, CEO of Muddy Waters Research

Muddy Waters Research founder and short-seller Carson Block has been known for calling out companies as frauds — but recently he's also been going after the hedge funds and banks that invest in the names in his crosshairs.

He has become one of the loudest voices within finance about "amoral investing," and told a conference room full of his peers last December that short-sellers "should put the world on notice." 

"The question I ask is: Should this business be running the way it is? Should it exist the way that it does, regardless of the way it generates money?" Block said at the conference.

"If the answer is no, then get the f--- out."

He targeted healthcare companies in particular, and said investors should start naming not only the executives of "scummy businesses" but the portfolio managers and analysts who continue to buy and support the companies. 

Short-sellers have, in the past, claimed moral high ground, saying they are protecting the market from frauds, and Block has taken it a step further with his call to morality. He has also helped one-time congressional candidate Dan David start his own due diligence firm after David gained prominence for exposing several fraudulent Chinese companies. 

See more: Activist short seller Carson Block is taking aim at 'amoral' investing practices and says it's time to 'name names'

Tim Harrington, founder of BattleFin

Tim Harrington has made alternative data so popular that his annual BattleFin conference in New York had to find a new venue after outgrowing an aircraft carrier.

Harrington, who previously worked for Steve Cohen's SAC Capital and JPMorgan, is a co-founder of BattleFin, which has become a one-stop shop for all things alternative data. 

His New York conference, where hedge funds can meet with people selling unique data sets pulled from things like satellite images and web traffic, now fills up multiple ballrooms at Plaza Hotel. 

See more: Hedge-fund managers are overwhelmed by data, and they're turning to an unlikely source: random people on the internet

The company has also rolled out Ensemble, where people looking to buy data can get a marketplace of pre-vetted sellers of everything from credit card receipts to social media trends to weather projections. 

And data provider Refinitiv invested in BattleFin in June— since then, a $27 billion deal has been announced for the London Stock Exchange to buy Refinitiv. 

As hedge funds and corporations continue to plow money into alternative data, Harrington has built an organization and platform for it to be put to use. While the field is quickly becoming the new norm, odds are new users will need a guide to sort through it all.

See more: Hedge funds' secret sauce is obscure data like satellite images. Here's how the people in charge of spending millions on this data find the stuff worth buying.

Ilya Figelman, head of multi-asset group at Acadian Asset Management

One of the biggest mistakes a hedge fund or asset manager can make is expanding into something they don't know.

Fixed-income giant PIMCO has struggled to find its niche in equities, while Andrew Feldstein's credit-focused hedge fund BlueMountain has cut two equities strategies within a year — and its majority stakeholder AMG just sold to Assured Guaranty. 

But quant firm Acadian Asset Management managed to stick to its roots while still making a jump into the multi-asset space, and brought its already successful computer-driven strategy to the arena of some of the most well-known security pickers. 

Ilya Figelman, who joined Boston-based Acadian three years ago to lead the effort, said he has recruited experts on a wide range of market topics to act as the final read for the algorithm's decisions.

They use over 200 factors to forecast prices for more than 100 potential assets across equities, bonds, currencies, commodities, and options — their way of quantifying the global macro strategies that funds like Tudor and Elliot made famous.

"We are not a black-box either," Figalman said. "We can explain this strategy and this process to investors." 

The 16-person team is only running $30 million in seed capital from Acadian right now, but has been generating interest among investors after making money during last year's fourth quarter, Figalman said. 

• Viking helped data-backup startup Druva Technologies push into unicorn status by leading a $130 million funding round earlier this summer. 
• The $30 billion hedge fund firm is opening its Viking Opportunities Fund to new commitments next year and making hires on its private investment team, according to an investor letter.
• Viking put in $107 million of the funding round for Druva. The hedge fund firm, which also holds stakes in Microsoft and Amazon, calls the startup a "first mover." 
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Count Druva Technologies as one company that's benefiting from hedge funds' push into the private markets. 

The 10-year-old cloud company reached unicorn status in June after a $130 million funding round led by O. Andreas Halvorsen's Viking Global Investors. The firm's Global Opportunities Fund accounted for $107 million of that round, according to an investor letter sent by Halvorsen on July 16. 

The $30 billion Viking said it believes that Druva, which has locations in six different countries, is positioned to grow quickly. 

Viking said its investment in public companies with cloud businesses — Amazon and Microsoft are two of its biggest holdings — led it to "appreciate the advantages Druva derives from being the first mover in a business that requires significant upfront investment to reach scale."

The cloud company marks just one of many private investments Viking has made this year — the firm said in the letter it made more than $580 million in illiquid investments through the first half, and thanks to ideas like Druva, it is looking to grow its private investment team. 

Viking has been active in the private market space, along with fellow "Tiger Cubs"— investors who worked for Julian Robertson's Tiger Management — Coatue Management and Tiger Global, as well as TwoSigma and Perceptive Advisors. 

See more: Lone Pine Capital stock-pickers explain why they're investing in Tiffany and Nintendo and how they value 'disruptors' like Beyond Meat

Hedge funds, which have struggled to outperform the market and justify their fees, have increasingly turned to high-risk, high-reward investments in young private companies that used to only fundraise from venture capital firms.

The Global Opportunities Fund has posted a return of 22.5% through the first half of the year, the letter said, besting both the market and the average hedge fund. 

The three funds that make up Viking — Global Opportunities, Global Equities, and Long Fund — now have roughly $30 billion in assets, just two years after dropping to $24 billion when Viking returned $8 billion of the Global Equities and Long Fund's assets to investors. 

Viking's growth since then has mostly been through returns, the letter said, though Global Opportunities received $900 million in new subscriptions from existing investors even as the other two funds have seen redemptions.

Because of the pace of "idea generation," the Global Opportunities fund will be opened to new commitments on Jan. 1, the letter said.

Viking declined to comment when reached for additional comment on the firm's plans. 

The letter said that Viking's five-person private investment team, led by Brian Kaufmann, will have two additional members joining the summer. There is also an open position for an eighth role. 

"The attractive deal flow sourced by the team is reflected in the capital deployed and committed to illiquid investments," the letter states. 

Three of the firm's private investments went public in the second quarter — BridgeBio Pharmaceuticals, Adaptive Biotechnologies, and Uber. The first two companies saw their stocks jump on the first day of trading, and Viking now owns a combined $760 million worth of stock in the two companies, despite investing less than $300 million in them over four years.  

See more: Mutual funds are valuing unicorns like WeWork and Sweetgreen very differently. Now the SEC is paying more attention to these private stakes.

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• Hedge funds are crowding into a handful of stocks and increasing their use of leverage at the same time, according to Goldman Sachs.
• With recession fears at a fever pitch and market liquidity still scarce, hedge fund favorites are "particularly vulnerable" if there's an unwind, Goldman's equity strategists said.
• They also provided a recommended hedge against losses in case the favorite trades implode.
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Hedge funds have long crowded into the best-performing stocks in the market.

After all, it's easier to invest in the companies that are boosting most of your peers' portfolios than it is to be contrarian and hope for stronger results.

This behavior has recently picked up again after cooling down, according to Goldman Sachs' hedge fund crowding index. Now that recession fears are at a fever pitch, the firm is warning that hedge funds' favorite stocks are particularly vulnerable if there's a market unwind.

In a recent note, a team of equity strategists including Ben Snider spelled out why funds could be severely punished if there's a rush for the exits.

Hedge funds have steadily increased the share of their portfolios that is held in a handful of companies over the past 15 years. The average fund now holds 69% of its long portfolio in its top 10 positions, up from 57% in 2004, Snider said.

Funds have also become more reluctant to rotate out of these concentrated bets. In the second quarter, the average fund turned over 26% of its individual equity positions, down from a range of 35% to 40% that was typical during the previous cycle, according to Snider.

This combination of high concentration and low turnover has fueled the strong performance of momentum factor investing, a style that involves buying stocks that have recently outperformed and selling the laggards. Goldman's long-short momentum factor has returned 13% in August, tracking its best monthly performance in 10 years.

As hedge fund crowding has recently increased, so has leverage.

Funds were skittish about debt earlier, as the market sold off to start this year. Then after the Federal Reserve cut its benchmark rate and the White House delayed its latest round of tariffs on China, they reopened the spigots of leverage in pursuit of higher returns.

But in a few short weeks, the most closely watched part of the yield curve inverted, setting off alarms that the next recession was coming. Another bout of volatility in the stock market could jolt hedge funds out of the positions they've come to rely on for returns.

"The recent increase in hedge fund concentration and leverage make funds particularly vulnerable to a potential market unwind, particularly if accompanied by the decline in liquidity that typically coincides with falling risk appetite," Snider said.

He added: "In recent weeks, as fears of economic recession have spiked, so have equity volatility and illiquidity, following the usual pattern."

Read more:JPMorgan's quant guru says the main driver of recent stock turmoil has nothing to do with recession fears — and explains why it's now a bullish force

Wall Street witnessed the fallout of illiquidity firsthand last week, when the major stock indexes fell 3% in their steepest sell-off yet of 2019. According to Marko Kolanovic, JPMorgan's head of macro quantitative and derivatives strategy, more than half of the sell-off can be attributed to systematic trading programs that operated in illiquid markets.

This means that while investors butt heads over when the next recession is coming, the market's underlying lack of liquidity could amplify any sell-off in the interim. And the stocks hedge funds have crammed into may not save them — in fact, the selling in an illiquid environment could do quite the opposite.

To protect against this eventuality, Snider says investors should consider Goldman's basket of stocks that appear most frequently as top-10 positions in its hedge fund universe.

"Intuitively, the basket has historically moved with large changes in hedge fund net leverage, lagging the S&P 500 when funds cut risk," Snider said. "In addition, the basket has exhibited a larger beta to the S&P 500 during market declines than during market rallies, making it particularly attractive as a hedge."

The newest constituents of the so-called VIP basket include Allergan, Micron Technology, Zillow, and S&P Global.

SEE ALSO: The market's biggest investors just traded like they do right before 'serious damage' is inflicted on stocks — and one expert warns another painful meltdown could soon strike

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• Hedge funds have already seen $20 billion more in outflows this year compared to 2018 as investors seek lower fees and better performance, Bloomberg reported.
• The funds lost $8.4 billion from investor outflows in July, hitting a net withdrawal of $55.9 billion year-to-date. Investors pulled $37.2 billion in all of 2018.
• The best-performing category was event-based funds, which has seen a net inflow of $10.3 billion year-to-date.
• Visit the Markets Insider homepage for more stories.

Hedge funds are already making 2018's multibillion-dollar outflows look appealing.

The institutions have collectively seen $55.9 billion pulled from their funds this year, up from $37.2 for all of last year, Bloomberg reported, citing eVestment data. Investors took back $8.4 billion in July.

The industry's losses are not evenly distributed, with 37% of hedge funds bringing net inflows throughout the year. Long/short equity funds have been hit the hardest, with investors collectively yanking $25.5 billion year-to-date. These funds focus on shorting stocks analysts deem overpriced while taking long positions on underpriced equities.

The funds most insulated from the year's exodus have been event-driven funds, Bloomberg reported. The category saw $10.3 billion in net inflows through July. Event-driven funds make money through mergers, takeovers, bankruptcies, and other events that move stocks.

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More hedge funds have closed their doors than started in each of the last three years, Bloomberg reported. Investor frustrations have pushed management fees lower as funds look to boost their customers' returns.

Goldman Sachs recently warned hedge funds that recession fears and subsequent crowding into popular stocks could set the industry up for disaster. The analysts found hedge funds' portfolio density creeping higher in recent months, risking a massive selloff should any of the crowd-favorite companies tank.

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• Hedge funds disclosed their most recent holdings in public filings earlier this month, providing a window into which companies some of the world's most successful money managers are betting on.
• Goldman Sachs put together a list of the stocks that appear most frequently in the top 10 largest holdings within hedge fund portfolios. 
• The "Hedge Fund VIP List" features the top long positions of fundamentally-driven hedge funds, excluding firms that use quantitative strategies or attempt to mirror private equity investments. 
• Here are 12 companies most loved by hedge funds in the second quarter.
• Visit the Markets Insider homepage for more stories.

Earlier this month, hedge funds revealed which public companies they bought and sold during the second quarter. 

Hedge funds are required to disclose stakes in public companies four times a year, following the end of each quarter. Goldman Sach's created a list of the top stocks these money managers purchased in the second quarter based publicly-available 13F filings.

Goldman's "Hedge Fund VIP List" includes the top long positions of fundamentally-driven hedge funds. The firm's analysis was limited to funds with between ten and 200 equity positions in effort to exclude funds that apply quantitative strategies or attempt to mirror private equity investments.

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When hedge funds show interest in a particular stock, its often a good sign, according to Goldman's analysis. 

"Changes in popularity with hedge fund investors can be strong signals for future stock performance," the firm said in the report. 

Here the 12 stocks most loved by hedge funds in the second quarter, ranked in increasing order of how many have them in their top 10 holdings:

12. Allergan

Ticker: AGN

Industry: Pharmaceuticals

Year-to-date return: 20%

Number of funds with stock as top 10 holding: 27

Source: Goldman Sachs

11. Comcast

Ticker: CMCSA

Industry: Cable & Satellite

Year-to-date return: 28%

Number of funds with stock as top 10 holding: 29

Source: Goldman Sachs

10. Mastercard

Ticker: MA

Industry: Data processing & outsourced services

Year-to-date return: 46%

Number of funds with stock as top 10 holding: 33

Source: Goldman Sachs

9. Visa

Ticker: V

Industry: Data Processing & Outsourced Services

Year-to-date return: 36%

Number of funds with stock as top 10 holding: 36

Source: Goldman Sachs

8. Netflix

Ticker: NFLX

Industry: Movies & Entertainment

Year-to-date return: 13%

Number of funds with stock as top 10 holding: 39

Source: Goldman Sachs

7. Disney

Ticker: DIS

Industry: Movies & Entertainment

Year-to-date return: 24%

Number of funds with stock as top 10 holding: 41

Source: Goldman Sachs

6. Celgene

Ticker: CELG

Industry: Biotechnology

Year-to-date return: 48%

Number of funds with stock as top 10 holding: 44

Source: Goldman Sachs

5. Alphabet

Ticker: GOOGL

Industry: Interactive Media & Services

Year-to-date return: 13%

Number of funds with stock as top 10 holding: 46

Source: Goldman Sachs

4. Alibaba

Ticker: BABA

Industry: Internet & Direct Marketing Retail 

Year-to-date return: 27%

Number of funds with stock as top 10 holding: 54

Source: Goldman Sachs

3. Microsoft

Ticker: MSFT

Industry: Systems Software

Year-to-date return: 36%

Number of funds with stock as top 10 holding: 70

Source: Goldman Sachs

2. Facebook

Ticker: FB

Industry: Interactive media & services

Year-to-date return: 40%

Number of funds with stock as top 10 holding: 71

Source: Goldman Sachs

1. Amazon

Ticker: AMZN

Industry: Internet & Direct Marketing Retail

Year-to-date return: 19%

Number of funds with stock as top 10 holding: 95

Source: Goldman Sachs

• The best-performing hedge fund of 2019 has seen the value of its portfolio increase 278% since the start of the year, according to Bloomberg. 
• The Vanda Global Fund, a Singapore-based firm run by Chong Chin Eai, manages about $194 million and trades on Swiss-Asia Asset Management's fund management platform. 
• The fund specializes in exchange-traded futures across a variety of asset classes including equities, commodities, and government bonds. 
• Visit the Markets Insider homepage for more stories. 

The top-performing hedge fund of 2019 has skyrocketed 278% since the start of the year, according to Bloomberg. 

The Singapore-based Vanda Global Fund, which is run by Chong Chin Eai and manages about $194 million, specializes in exchange-traded futures that track commodities, equities, and government bonds. 

Futures are typically considered a more risky investment compared to purchasing a share of stock or a corporate bond, as they involve a contract to buy or sell shares of an underlying security at an agreed-upon price or specific date in the future. Exchange-traded futures are a form of derivatives based on existing ETFs, which typically track a basket of assets like stocks or bonds.

The volatility of investing in futures can been seen in Vanda's returns for the past two years. Vanda rose 260% in 2017, but fell 49% in 2018, according to Bloomberg. 

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Chong started the fund about three years ago with $24 million from friends and family, Bloomberg reported. The fund cratered 50% after Donald Trump's presidential victory rocked the stock market in late-2016, and Chong contemplated closing the firm and dipping into his own personal savings to recuperate his investors' losses. 

"A lot of fund managers would've just given up after six months to start a brand new track record," Chong told Bloomberg. "But I wanted to show investors the flow of the fund and the growth of the fund, both in terms of the performance and also in myself."

Vanda has between 10 and 15 investors, and is looking to raise an additional $20 million in capital over the next year, Bloomberg reported. Investors who chip in more than $1 million will have to pay a 2% management fee and a 20% performance fee. For those that invest the minimum of $250,000, the cost rises slightly to a 2.5% subscription fee and a 25% performance fee.

In an effort to hedge against the risk of investing in ETF futures, Chong puts half of the fund into highly-liquid money market investments that yield a small interest rate.

The firm trades on Swiss-Asia Asset Management's fund management platform. 

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• D.E. Shaw in April asked employees to sign noncompete contracts by mid-September. The hedge-fund manager had "nonsolicit" contracts before but hadn't required noncompetes for all investment staff. 
• The firm has since made the original noncompete contracts more employee-friendly by changing how deferred compensation is paid out, sources inside the firm told Business Insider. 
• The noncompetes also give investment staff the option of walking away from the $50 billion hedge-fund manager with all deferred compensation paid out immediately, adding to the already high stakes D.E. Shaw is facing to retain talent. 
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D.E. Shaw has relaxed terms of its deferred-compensation structure ahead of a mid-September deadline on the firm's new noncompete contract for all investment staff to either sign the agreement or get fired, insiders said. 

The move spotlights uncertainty inside D.E. Shaw as it prepares to enforce wide noncompetes, which are fairly common in the hedge-fund industry, for the first time in its 30-year history. At stake is the $50 billion hedge-fund manager's investment talent — sources told Business Insider how longtime employees were assessing the terms and weighing if it makes sense to get pushed out and join a competitor. 

Three people who were asked to sign noncompetes at D.E. Shaw told Business Insider they have not yet signed the agreement and described wider pushback from staff. They also said they viewed the changes to the deferred-compensation structure as a bid by senior management to get more people to sign.

The Financial Times first reported in the beginning of June that D.E. Shaw had set a mid-September deadline for workers to sign noncompetes. On July 23, D.E. Shaw told workers it had revised the terms of the deferred-compensation plan for employees that leave the firm voluntarily, including letting employees keep more of their deferred compensation as long as they wait out their noncompete time frame between jobs, several sources told Business Insider. 

Before April, the firm's employment agreement required only nonsolicit agreements, meaning employees that left had to hold off on recruiting former colleagues and investors. D.E. Shaw had told staff that a noncompete put it in line with the broader hedge-fund industry, according to the FT report.

To be sure, the three insiders also told Business Insider that they knew of colleagues who had signed immediately once the original terms were revealed. And a source familiar with the firm's senior management told Business Insider that "dozens" of employees were returning signed contracts weekly. 

D.E. Shaw declined to comment when asked by Business Insider about the employee response to the noncompete and changes to the contract. 

Jason Zuckerman, a Washington-based lawyer that has represented hedge-fund employees in contract disputes, said that adding a noncompete after the fact to an employee contract was relatively uncommon. New York law requires noncompete clauses to "be no greater than needed to protect the legitimate interest of the employer," he said.

The three people working at D.E. Shaw also said people could leave the firm with their entire deferred pay intact if they did not sign the agreement, giving them optionality to wait right up to the deadline and take advantage of a better opportunity. 

"We see it as a type of career 'put' option," one person said. "Anyone who wants to bet on themselves is not going to sign."

In the FT report in June, the firm denied the noncompete deadline was related to the departure of former D.E. Shaw managing director Dan Michalow. His nonsolicit agreement runs out the same day employees will be required to sign noncompetes, after which Michalow would be able to recruit D.E. Shaw investors and employees if he were to start his own venture. 

Michalow left the firm in March 2018 after an investigation into allegations of inappropriate behavior, but he has fought the characterization of his departure and filed a defamation suit against the firm. He declined to comment for this story beyond pointing to a line in a memo to employees that D.E. Shaw's executive committee sent last year about his departure:"It's hard to overstate how seriously we take our responsibility to ensure that DESCO is a good place to work."

Read more: Inside D.E. Shaw's special relationship with Blackstone, which shines a light on the power the hedge fund industry's largest investors have

The noncompete time frames D.E. Shaw is asking employees to agree to range from three months to a year, meaning they can't start a new job until that time expires. But even under the new compensation terms, unless employees don't take another job for three years, they won't collect all of their deferred pay.

During the noncompete period, D.E. Shaw pays employees 150% of their salary and continues to provide health insurance, a source familiar with the agreement said, which is generous compared with industry standards.

The sources inside the firm who have not yet signed said their focus was on the deferred compensation, however, because most of their total pay — as is common in the hedge-fund industry — is paid out in bonuses that go into the deferred pool.

While other high-profile hedge funds also pay deferred compensation out over several years, most pay the full amount as long as the noncompete time frame is completed, according to two industry sources and one source at D.E. Shaw.

"It used to be that they kept your money, and that was your incentive to not leave, while other firms kept your time," one source inside the firm said. "Now they keep your money and your time." 

In the latest version of D.E. Shaw's deferred-compensation plan, if an employee leaves voluntarily, their deferred compensation is paid out at year-end over three years. If they start a new job after the noncompete period expires, they forfeit any compensation they have not yet received.

Under the terms of the long-running deferred-pay plan, an employee who started working at another hedge fund in the same calendar year that they left D.E. Shaw would forfeit any deferred compensation owed up until that point — even if they waited out the new mandated noncompete time period.

The people working at D.E. Shaw said they had felt pressured to sign without being able to offer feedback, with one person saying they felt there was a "double standard" with regard to how staff was expected to perform strategically in their jobs versus making decisions about the contract. 

The three people at the firm described the new deferred comp as an improvement from the employee perspective but said there was still a feeling of uncertainty around how many people would ultimately agree to the noncompete.

"It's a little bit of a golden ticket," a source inside the firm said of the ability for people to keep their deferred compensation if they don't sign. "It's basically let everyone go out and get a market check on what they're worth." 

Read more: The booming private market has some hedge funds spreading into private equity's domain. Now a tug-of-war has broken out over talent.

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• Ray Dalio's primary hedge fund shed 6% of its value this year as of August 23, according to a new report from Bloomberg. 
• Dalio's Pure Alpha fund, which invests in macroeconomic trends, took significant losses from bearish bets on global interest rates. 
• While Dalio's funds are struggling, other macro managers are capitalizing on investment opportunities sprouting from geopolitical uncertainties.
• Visit the Markets Insider homepage for more stories. 

One of Ray Dalio's main hedge funds is struggling this year. 

The Bridgewater Associates founder's Pure Alpha fund lost 6% of its value through August 23, according to a new report from Bloomberg. 

The fund invests based on macroeconomic trends and has experienced losses from bearish bets on global interest rates, Bloomberg reported, citing a person familiar with the matter. An offshoot of the flagship fund, dubbed Pure Alpha II, invests with higher leverage and had lost about 9% of its value as of August 23. 

While Dalio's macro funds appear to be struggling, competing firms are capitalizing on opportunities stemming from geopolitical uncertainties. According to data from Bloomberg, macro funds have risen 4.7% this year through July. 

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Bridgewater's Pure Alpha Major Markets fund has seen even bigger losses this year, falling about 18% through August 23. The All Weather Fund, which invests about half of the firm's capital in wide range of stocks, bonds, and currencies to buffer against volatile markets, is up about 12.5% this year, according to Bloomberg. 

Dalio said in a recent LinkedIn post that he's concerned monetary policy might be ineffective in preventing the next recession because interest rates are already so low. 

Bridgewater Associates is the world's largest hedge fund with around $160 billion in assets. 

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• Michael Burry, of "The Big Short" fame, foresaw the 2008 housing meltdown and bet against the subprime-mortgage bonds that exacerbated the crisis.
• Burry now runs his own hedge fund — Scion Asset Management — out of Cupertino, California.
• Listed below are his firm's 15 largest investments, according to data compiled by Bloomberg.
• Visit the Markets Insider homepage for more stories.

Michael Burry earned millions by betting against subprime-mortgage bonds in advance of the 2008 housing meltdown. 

His short trade was popularized by Michael Lewis' bestselling book "The Big Short," and the movie in which he was portrayed by Christian Bale. 

These days, he runs Scion Asset Management, a Cupertino, California-based hedge fund that owns $93.6 million worth of assets.

He hasn't stopped sounding alarms where he sees them. Most recently, Burry warned that passive investing is a "bubble."

His comments related to the trend of hedge funds and index-fund managers piling into a small collection of large-cap companies. The consolidation of capital leaves smaller growth stocks desperate for cash, Burry said.

"The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally," he told Bloomberg.

Burry is doing some active stock picking of his own, and recently told Barron's he was going long on GameStop.

The list below shows his firm's 15 largest positions by descending order of market value, according to data from regulatory filings and news reports compiled by Bloomberg.

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1. Autech

Market value: $14.76 million

Position: 1,500,000 shares

Ownership stake: 9.75% of shares outstanding

Year-to-date performance: up 13%

Source: Bloomberg

2. Western Digital

Market value: $13.77 million

Position: 250,000 shares

Ownership stake: .08% of shares outstanding

Year-to-date performance: up 54%

Source: Bloomberg

3. GameStop

Market value: $12.69 million

Position: 3,000,000 shares

Ownership stake: 3.32% of shares outstanding

Year-to-date performance: down 68%

Source: Bloomberg

4. Alphabet Inc. Class C

Market value: $10.74 million

Position: 9,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 14%

Source: Bloomberg

5. Tailored Brands

Market value: $9.66 million

Position: 2,600,000 shares

Ownership stake: 5.15% of shares outstanding

Year-to-date performance: down 61%

Source: Bloomberg

6. FedEx

Market value: $9.45 million

Position: 60,000 shares

Ownership stake: .02% of shares outstanding

Year-to-date performance: down 1%

Source: Bloomberg

7. Sansei Technologies

Market value: $9.39 million

Position: 1,104,000 shares

Ownership stake: 5.71% of shares outstanding

Year-to-date performance: down 50%

Source: Bloomberg

8. Cleveland-Cliffs

Market value: $8.77 million

Position: 1,100,000 shares

Ownership stake: .41% of shares outstanding

Year-to-date performance: up 3%

Source: Bloomberg

9. Alibaba

Market value: $8.64 million

Position: 50,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 27%

Source: Bloomberg

10. Cardinal Health

Market value: $8.45 million

Position: 200,000 shares

Ownership stake: .07% of shares outstanding

Year-to-date performance: down 4%

Source: Bloomberg

11. Walt Disney Co.

Market value: $8.27 million

Position: 60,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 25%

Source: Bloomberg

12. Sportsman's Warehouse Holdings

Market value: $6.52 million

Position: 1,597,011 shares

Ownership stake: 3.71% of shares outstanding

Year-to-date performance: down 4%

Source: Bloomberg

13. Yotai Refractories

Market value: $6.35 million

Position: 1,280,000 shares

Ownership stake: 5%

Year-to-date performance: down 9%

Source: Bloomberg

14. Tazmo

Market value: $6.03 million

Position: 686,800 shares

Ownership stake: 5.08%

Year-to-date performance: up 39%

Source: Bloomberg

15. Ezwelfare

Market value: $4.72 million

Position: 574,000 shares

Ownership stake: 5.27% of shares outstanding

Year-to-date performance: up 30%

Source: Bloomberg

• The investor Michael Burry rose to fame by shorting mortgage securities ahead of the 2008 housing meltdown.
  
• His wager was heavily featured in Michael Lewis' bestselling book "The Big Short," and Christian Bale portrayed Burry in the 2015 film adaptation.
  
• Burry currently has several active investments in small- and medium-sized Japanese companies, Bloomberg reported Wednesday.
• The Japanese stocks he chose have "significant cash or stock holdings" he wants to see used for share buybacks or acquisitions, Bloomberg found.
• Burry recently warned against passive investment being a "bubble" that keeps capital away from growth stocks and consolidates investment in large-cap companies.
• Here are the eight Japanese companies targeted by Burry, ranked in descending order of market cap.
• Visit the Markets Insider homepage for more stories.

The famous investor Michael Burry is targeting small- and medium-cap Japanese companies as he shifts his strategy to international value stocks, according to a new Bloomberg report.

Burry made waves when he bet against mortgage-backed securities ahead of the 2008 housing crisis. The hugely profitable trade was depicted in Michael Lewis' bestseller "The Big Short," which saw a film adaptation in 2015 with Christian Bale playing Burry.

Michael Burry recently warned passive investment is a "bubble" that keeps small-cap companies struggling for cash. The manager is now "100% focused on stock-picking" after exiting investments in farmland and water, Bloomberg reported. He recently disclosed major stakes in US and South Korean value stocks through his hedge fund, Scion Asset Management.

Burry is also specifically focused on Japanese stocks, particularly those with large cash reserves, Bloomberg found. The investor says he's encouraging companies to utilize their holdings, a move that could draw increased interest from international investors. 

"I want to see evidence that the company is investing to grow the business, buying back stock, paying dividends, or making accretive acquisitions," Burry wrote in an email to Bloomberg.

Here are eight Japanese companies Burry has stakes in, by descending market cap:

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Kanamoto

Market cap (USD): 982.15 million

Year-to-date performance: down 8%

The company leases construction machinery and tools.

"They run a tight ship from a credit perspective, and maintain their equipment for high resale at auction," Burry told Bloomberg.

Tosei

Market cap (USD): $578.48 million

Year-to-date performance: up 52%

Burry called Tosei an "opportunistic player in urban real estate," praised its management, and noted the company is "executing in every facet of the business."

Altech

Market cap (USD): $334.34 million

Year-to-date performance: down 1%

Altech "will benefit from recent immigration reforms as it expands into agriculture and patient care areas," Burry told Bloomberg. The company provides mechanics and engineers for-hire to a growing portfolio of industries.

Murakami

Market cap (USD): $277.53 million

Year-to-date performance: up 3%

The car mirror company forecasts growth and stock buybacks, but it won't be enough help the shares recover from a 35% drop in 2018, Burry said.

"Situations like that call for more dramatic action, and I'd like to see large tender offers for one-third or more of the shares, large special dividends. I just have not seen that, and there is a long way to go."

Nippon Pillar Packing

Market cap (USD): $254.22 million

Year-to-date performance: down 9%

Burry forecasts the stock surging on "a high beta to the sector as the inventory of tech components is finished off and growth resumes." Nippon produces mechanical seals, gaskets, and packing supplies, according to Bloomberg.

Sansei Technologies

Market cap (USD): $195.15 million

Year-to-date performance: down 49%

The company "should pay down debt to improve cash flow and to put it in a position for another acquisition," Burry told Bloomberg. Sansei makes elevators and theme park rides.

Yotai Refractories

Market cap (USD): $129.64 million

Year-to-date performance: down 3%

Yotai produces materials used in electric furnaces, and should buy back stock with its 4.4 billion yen reserves, Burry said.

Tazmo

Market cap (USD): $116.63 million

Year-to-date performance: up 64%

The producer of chip-making tools "needs to invest in its business to develop the potential of the markets it serves," Burry told Bloomberg.

• Spruce Point Capital issued a report saying it believes the stock price of Church & Dwight, the maker of Trojan condoms, Arm & Hammer baking soda, and several other consumer brands, is overvalued. Spruce Point has a short position in Church & Dwight, and benefits if the shares fall.
• The $270 million short-seller flagged the company's reliance on brick-and-mortar stores and declining sales in old and new brands, and said that it had paid too much for recent acquisitions. 
• Other brands owned by Church & Dwight include hair removal cream Nair, cleaning material OxiClean, First Response pregnancy tests, and laundry detergent Xtra. 
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A new report from short-seller Spruce Point Capital is targeting Church & Dwight, the maker of Trojan condoms.  

Church & Dwight, which also owns Arm & Hammer baking soda, Nair hair removal cream, and pregnancy test kit First Response, has been active in M&A since CEO Matthew Farrell took over in 2016.

Acquisitions include a $1 billion deal for flossing technology Waterpik in 2017  — and Spruce Point called that a "significant" overpay. Spruce Point has taken a short position in Church & Dwight, and benefits if the shares fall.

Church & Dwight also inked an agreement this year to buy FLAWLESS, another hair removal company. That arrangement includes $475 million in cash plus an earn-out, meaning the total price tag could balloon to $900 million in 12 months if sales targets are hit, a statement announcing the deal said.

Church & Dwight did not immediately respond to requests for comment.

See more:A short seller says the company that sells wedding rings to much of America is overvalued, and he's betting that Amazon will steal its business

Spruce Point Capital, the $183 million short-seller run by Ben Axler, notched solid returns in 2018. The firm made 24% in a year when most hedge funds lost money. 

Spruce Point's new report argued that Church & Dwight's stock price is 35% to 50% higher than where it should be. The company, according to the short-seller report, is too reliant on brick-and-mortar stores to sell its core products, many of which have been declining in sales — like Trojan condoms, OxiClean, and Xtra laundry detergent. 

Of the 11 long-term brands that Church & Dwight has acquired since 2001, only Arm & Hammer and dry shampoo-maker Batiste are considering to be trending up, according to Spruce Point. 

Spruce Point said that it believes shares of the company could fall to roughly $40-$52. Shares are currently trading around $76, down some 5% on the day.

Spruce Point Capital has also targeted Pennsylvania-based grocery store chain Weis Markets, diabetes monitoring device-maker Dexcom, and Burlington Stores, which runs clothing retailer Burlington Coat Factory. The firm announced its first long position, in healthcare products distributor Henry Schein, in three years last summer. 

See more: Arts-and-crafts retailer Michaels is under fire from a short-seller who says Amazon and Framebridge are threatening its framing business

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• The billionaire Ray Dalio — the founder of Bridgewater Associates, the world's largest hedge fund — told Bloomberg he sees a 25% chance of recession in 2019 and through 2020.
• He cited the effectiveness of central-bank policies, the wealth gap, the 2020 US elections, and the economic emergence of China as key factors in deciding the intensity of the next economic downturn.
• The Bridgewater founder also warned the Fed should slowly cut rates by small increments.
• Visit the Markets Insider homepage for more stories.

Ray Dalio told Bloomberg he sees a 25% chance of economic recession in the rest of the year and through 2020, and that central banks can only do so much to avert it.

Dalio — who founded Bridgewater Associates, the world's largest hedge fund — listed four separate factors that he believes will affect the severity of the next economic downturn. The combined variables are "unique" and haven't existed since the 1930s, Dalio said on "The David Rubenstein Show."

The factors are:

• Effectiveness of central-bank policies
• The wealth gap, which will affect how the next recession will look "socially, politically, and so on"
• The 2020 elections, which he called "an issue between capitalists and socialists, or the rich and the poor"
• The emergence of China in relation to the US

The billionaire added that central banks around the world "have to face the fact that when the next downturn comes there will not be the power to reverse it in the same way" they recovered from the 2008 financial crisis. He recommended the Fed cut interest rates slowly and by small increments instead of rushing to invigorate the US economy.

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The Fed cut interest rates for the first time since the financial crisis on July 31, with Fed Chairman Jerome Powell calling the move a "mid-cycle adjustment."

Though President Trump has repeatedly pushed for large rate cuts, he's likely to be disappointed by the Federal Open Market Committee's September 18 meeting. The national economy is "relatively strong," and rapidly cutting the interest rate could be costly in the future, Boston Fed President Eric Rosengren told The Washington Post on Tuesday.

"You don't want to apply accommodation at a time when you don't need it, in part because you won't have it when you do need it and in part because there are side effects from pushing interest rates very low. It encourages people to take more risk," Rosengren said. 

Bridgewater's main hedge fund — Pure Alpha — is reportedly down about 6% as of August 23, despite other macro-focused funds rising through 2019. Bridgewater has about $160 billion in managed assets.

Now read more markets coverage from Markets Insider and Business Insider:

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• A new lawsuit between D.E. Shaw and a former portfolio company unveils both the complicated dealmaking that has come to be a part of many large-scale hedge funds and the difficulties in valuing private companies.
• The suit alleges that the $50 billion hedge fund sold off a litigation finance unit at a discount and that the unit's founder did not receive the same payout as other equity holders.
• Click here for more BI Prime stories.

An ongoing legal battle between the high-powered hedge fund D.E. Shaw and a former executive is shining light on the difficulty of valuing private companies.

Gary Chodes, the founder of Oasis Financial, a player in the booming litigation finance space, is suing the $50 billion hedge fund, claiming that it sold Oasis in a hurry for less than what it was worth. D.E. Shaw bought a majority stake in Oasis in 2007 through a fund known as D.E. Shaw Composite Side Pocket, and it sold the company to the private-equity manager Parthenon in 2016.

Side-pocket funds are used by hedge funds as their own internal private-equity vehicle, which have longer timelines than many funds' traditional strategies. These funds are not meant to be long-lasting products — they often close once an investment thesis plays out.

Chodes also claims that equity holders in the side-pocket fund D.E. Shaw used to buy Oasis improperly received payouts from the deal and that he got nothing, even though he still had a chunk of equity and an Oasis board seat.

The lawsuit was filed in February 2018 but has not previously been reported. Recently, an Illinois judge rejected a motion to dismiss the suit from the defendants, pushing the suit closer to trial. A date is set for November 18, though it is expected to be delayed, according to sources close to the defendants.

The side-pocket fund, which worked like a private-equity fund within D.E. Shaw, is one of several ways large asset managers known for their hedge funds have gotten exposure to the private markets. Funds like Two Sigma, Tiger Global, Coatue, and Point72 have built out venture-capital-like arms to evaluate investments outside the public sphere as outperforming in stocks alone has become more difficult.

Read more: A Viking Global hedge fund is helping startups turn into unicorns. Now it's hiring more people to ramp up investments.

Private investments are booming

Litigation finance, of which Oasis is a key player, is an area that alternative asset managers like hedge funds have turned to for returns. The growing niche strategy lends money to people looking to sue corporations or other individuals, and receives a portion of whatever settlement is won. Oasis had reportedly underwritten more than 100,000 lawsuits as of 2016, and lawsuits funded by third parties are expected to grow by 20% to 30% annually in the next few years, according to Vannin Capital.

Yet despite the growing popularity of private investments, these companies can be difficult to value (as shown recently through scrutiny around WeWork's value).

The lawsuit claims that before the sale to Parthenon, Raymond James bankers hired by D.E. Shaw pegged Oasis' valuation at more than $140 million — roughly double what it ended up selling for. Sources familiar with the deal also said the Chicago-based private-equity company GTCR made a preliminary bid for Oasis of $105 million to $125 million.

Chodes argues in the suit that the main parties driving the sale — D.E. Shaw and Raymond James — were motivated to get a deal done quickly, which is why the company was sold for such a discount.

The lawsuit also noted that the Raymond James bankers working the deal were also negotiating their departure from the firm to Stifel's Keefe, Bruyette, & Woods; their exit was announced roughly a month after the deal closed.

"Notwithstanding having market information and professional analyses available to them showing even better economic times in 2017 (which they considered for the good of their own companies but not for Oasis), the defendants pushed for the immediate sale of the Oasis Companies to Parthenon for an undervalued price and ignored obvious alternative options," the lawsuit said.

The lawsuit claims the D.E. Shaw Side Pocket owning the majority stake had become a "zombie fund" that held onto its assets longer than it had wanted and that the hedge fund wanted to be done with the side project.

However, the bankers working on the sale of Oasis may have initially overshot its worth, according to details in the suit. The litigation finance firm had seen its debt skyrocket since Chodes was removed as CEO in 2013, deflating its valuation.

Raymond James, D.E. Shaw, Chodes, and GTCR all declined to comment.

Many legal battles ahead

The suit is the latest in a long-running legal battle between Chodes and his former company.

There are ongoing cases alleging Chodes misappropriated trade secrets when he started his new litigation finance firm, Signal Funding. Employees who worked for Chodes at Oasis and since joined Signal have also sued Oasis over "overbroad" noncompete contracts that prevented them from working at a competitor for more than two years.

Read more: D.E. Shaw asked staff to sign a take-it-or-leave noncompete, and the deadline is weeks away. Insiders say some people could walk even after management improved the payout.

The lawsuit also states that D.E. Shaw's Side Pocket investors received $7.2 million for its equity stake in Oasis, while Chodes, who still held a chunk of equity and a board seat despite being relieved of his CEO position in 2013, did not. Chodes, the lawsuit said, was told that no equity holder was going to receive any payout because the money from the merger was going to be used to pay down Oasis' debt, which had ballooned in the years before the sale.

Yet equity holders in the Side Pocket fund still profited off the sale, according to a letter from James Witz, a lawyer representing the defendants, that is cited in the lawsuit.

"Witz indicated that Chodes' or Group's portion of the side deal transfer had 'always' been available for equity owners," the suit said. "Yet for over a year, Witz and the defendants had lied, telling Plaintiffs that there were no sale proceeds available for equity owners."

Sources close to the defendants said that the allegation that equity holders were treated differently would be challenged during the litigation and that Chodes lost his board seat when he was removed as the CEO of Oasis in 2013.

Read more: Inside D.E. Shaw's special relationship with Blackstone, which shines a light on the power the hedge fund industry's largest investors have

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• Some of the biggest losses from August came from macro hedge funds that bet big and lost on recent elections in Argentina that sent the South American country's inflation rate soaring once again. But other notable funds tripped up as well.
• BlackRock's long-running Obsidian fund and Perceptive Advisors, as well as the UK's Lansdowne Partners, posted August losses. 
• Hedge funds as a whole mostly broke even, according to Hedge Fund Research, while the S&P lost roughly 2% for the month. 
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For many hedge funds, August was a month where a bad bet on Argentina might have ruined your year. 

Funds like Autonomy Capital, which lost $1 billion when Argentina elected out President Mauricio Macri for the more left-leaning Alberto Fernandez, will recall August wearily.

But several other large funds that didn't make bets on the outcome of a foreign election also struggled in August. 

In the US, Joseph Edelman's well-known Perceptive Advisors Life Sciences fund, which invests in healthcare and biotech, tumbled by more than 9% while BlackRock's long-running Obsidian fund lost roughly 3% for the month. One of the UK's biggest hedge-fund managers, Lansdowne Partners, also posted a loss of 4% in its flagship Developed Markets fund.

The US equity market fell by roughly 2% in the month, while the average hedge fund roughly broke even.

Read more: From an army of traders in Long Island to quants around the world: What's coming next for hedge-fund powerhouse Schonfeld Strategic Advisors

"There were no material negative catalysts that contributed to our August performance," Jim Mannix, the chief operating officer of Perceptive, said in an email.

"The Fund's performance in August was attributed to the general volatility in the market and, to a larger degree, some of our larger positions, which had performed very well YTD through July, experienced a larger pullback than the broader market/biotech index."

Perceptive's Life Sciences fund, which manages more than $3 billion, is still up for the year, posting a return of more than 20% for 2019 even after the tough August. Some of the firm's biggest holdings — like the biotech companies Global Blood Therapeutics and Mirati Therapeutics — fell in August but have rebounded so far in September. 

The same cannot be said for Lansdowne, which declined to comment. 

Lansdowne has not made money in its flagship fund, which manages more than $5 billion, since 2017. This year, the fund is down more than 9% through the end of August. According to a Financial Times story from earlier this summer, Lansdowne has suffered from short positions not paying off. 

Read more: Humans are beating machines, and Pershing Square and Greenlight are crushing it. Here's how hedge funds performed in the first half.

"Market strength just overwhelmed negative newsflow," Peter Davies and Jonathon Regis, the managers of the fund, wrote in a letter to investors earlier this year. 

BlackRock's Obsidian fund, which invests in rates, mortgages, corporate credit, and more, fell roughly 3% in August but is still up 8.5% for the year. The fund lost money in 2018 while posting returns of roughly 7% in both 2017 and 2016, according to an investor document.

The average hedge fund, according to Hedge Fund Research, is up 7.8% in 2019 through August. 

Obsidian, which manages roughly $2 billion, is run by Stuart Spodek and BlackRock's oldest hedge-fund product. The firm declined to comment. 

Read more: Meet the 8 people with new ideas about data, fees, and tech who are shaking up the $3.2 trillion hedge fund game

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