Why Balyasny spent $50m on the Citadel guy with a $60m loss
There has been a discontinuity in the hedge fund continuum.
As we noted in today's Morning Coffee, hedge fund Balyasny Asset Management (BAM) is said by Bloomberg to have spent $50m hiring portfolio manager Dave Brodsky from rival hedge fund Citadel, even though Citadel says Brodsky had a drawdown (loss) of $60m when he left.
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It's a story that has raised eyebrows for various reasons.
Citadel's risk tolerance and support for staff
Citadel informed Bloomberg it offered Brodsky "support to work through the draw," demonstrating that Citadel can be lenient with portfolio managers who make short term losses.
Citadel doesn't have strict risk limits and didn't let go of anyone due to performance during the US equities sell-off in early March. Nor did it cut anyone's risk during that period. Instead, after Ken Griffin instructed the fund to "play offense," Citadel actually granted capital allocation increases to a quarter of its US fundamental equity PMs (of which Brodsky was one).
Citadel's approach contrasts to rival multistrategy fund Millennium, where your capital allocation will reportedly be halved if you're down 5%, and where you'll (very probably) be fired if you're down 7.5%.
It's not clear how much capital Brodsky was managing, but if it was anything less than $800m, it leaves Citadel looking like a supportive place to work.
BAM's big offer
Balyasny paid $50m for Brodsky despite his $60m loss at Citadel, and despite the fact that he now has to sit out of the market for 21 months on a non-compete. It might be presumed, then, that Brodsky is getting $2.4m a month for twiddling his thumbs.
The reality is more complex.
The nuances
Although Brodsky walked away from a loss that was thought to be around $65m, it's understood that he was a highly profitable portfolio manager over a longer period. Brodsky joined Citadel in 2020 and is understood to have made hundreds of millions in PnL in the following years. Citadel is thought to have been helping him to work through the loss precisely because of this long track record of profitability.
Nonetheless, Brodsky left midway through an unwind of his positions, leaving his team at Citadel in the lurch. Arguably, this wasn't a nice thing to do, but if you lose money at a hedge fund, you typically won't get a bonus until you've made it back again.
In these circumstances, BAM's $50m offer to Brodsky would have been appealing. However, Brodsky isn't getting $50m by BAM for doing nothing. Instead, that sum is understood to include money to build his team and "accelerators" which will mean he receives a higher proportion of his initial profits than usual once he finally starts trading in 21 months time.
The situation offers an insight into the way multistrategy hedge funds work. It also shows why people like Brodsky tend to move between them, collecting large amounts of money in the process.
Citadel and Balyasny declined to comment for this article.
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