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Michael Gelband Said to Start Record $8 Billion Hedge Fund

(Bloomberg) -- Michael Gelband spent much of his career playing second fiddle to Wall Street chieftains. Now he’s stepping to the fore with the biggest hedge fund startup ever.

His firm is expected to start next month with $8 billion, according to people with knowledge of the matter. In the uneasy atmosphere of hedge funds, it’s a staggering amount. Not to mention that Gelband’s investors are paying through the nose to park money with him as other hedge funds cut fees, see assets shrink or shut altogether.

Gelband, 59, the one-time heir apparent to Millennium Management’s billionaire founder Izzy Englander, caused a stir last year after falling out with his erstwhile boss and then trying to hire away some of his traders and staffers. Some read Gelband’s decision to name his fund ExodusPoint as a stick-it-to-the-boss gesture. Now the question is whether his multi-manager firm can deliver profits to match its high-profile launch when others have tried and failed to build such eat-what-you-kill funds.

“They’re going to have to show their A-game right from day one,” said Ronan Cosgrave, a managing director at Pacific Alternative Asset Management Co., which invests in hedge funds. “They don’t have the luxury of building a track record quietly behind the scenes.”

From New York to London, Gelband has been the subject of chatter on trading desks at banks, each vying for a slice of lucrative business from his hedge fund’s 30 or so teams that start wagering in fixed-income and stock markets on June 1. Gelband, who was bond chief at Millennium, is bringing some of that firm’s DNA to ExodusPoint Capital Management: money managers will be on tight leashes making measured bets, seeking to churn out a steady stream of profits. And like Englander, Gelband won’t trade himself.

Expansion Plans

On the ninth floor of a skyscraper just off Manhattan’s Park Avenue, Gelband and his longtime colleague Hyung Soon Lee have been assembling the new firm, which will trade across multiple markets in the multi-manager model. They’ve hired 125 employees, the people said. They include former Lehman Brothers Holdings Inc. bond trading star Jon Hoffman and a handful of money managers from Man Group Plc’s GLG Partners. In addition to its London outpost, ExodusPoint plans to open offices in Asia.

Gelband declined to comment through his spokesman.

BlackRock Inc. and Blackstone Group LP are among firms putting their client’s money to work at ExodusPoint, as well as UBS Group AG and Goldman Sachs Asset Management, according to people with knowledge of the matter. Spokespeople for the firms declined to comment.

ExodusPoint is benefiting as investors move money from hedge funds that have disappointed them in recent years and after bigger firms like Millennium and Ken Griffin’s Citadel have restricted new money coming into their funds.

Michael Gelband Said to Start Record $8 Billion Hedge Fund

In Gelband, investors see an old Wall Street hand. The bald, 6-foot-tall executive ran big global trading businesses with a close eye on the amount of money that traders stood to make or lose.

As Lehman’s fixed-income boss, he was among those at the epicenter of the bank’s crisis a decade ago. Gelband urged executives that his group needed safeguards put in place for its burgeoning subprime mortgage holdings two years before the bank collapsed. Lehman’s chief Richard Fuld rejected such hedging as too costly. Gelband was ousted in 2007. He returned the following year to help the bank deal with its financial crisis.

ExodusPoint Fees

ExodusPoint’s launch comes as the industry struggles with growth. Clients placed $9.8 billion with funds last year, the least amount since 1998, according to Hedge Fund Research. And for three years running, the number of traders starting out has been outnumbered by those shutting.

Gelband also bucks industry trends in another way: his hedge fund is one of the most expensive.

Instead of charging the standard fixed management fee, ExodusPoint will pass on unlimited costs to investors that are expected to be “substantial” over time, according to a regulatory filing. Millennium and Citadel also pass on costs. ExodusPoint’s clients will be on the hook for everything from bonuses and broker commissions to private air travel that’s the equivalent of first-class airfare and recruiting costs, the filing shows. While investors will pay for office furniture, they don’t cover the artwork.

The fees are a bold move in an environment where investors are fighting back against pricey money managers who produce paltry returns. Management fees have edged down on average to about 1.4 percent of assets from 2 percent, according to HFR.

Leaving Millennium

Before Gelband, Harvard University’s former endowment chief, Jack Meyer, held the record for the biggest launch, raising $6.3 billion for his hedge fund 12 years ago.

Gelband’s startup marks a decade since Englander hired him and tasked him with building up Millennium’s fixed-income business. Lee, who had worked with Gelband at Lehman, joined soon after and later ran equities.

As Gelband grew Millennium’s fixed-income group to as many as 45 teams, Englander saw him as someone who could step into the founder’s shoes if needed. While Englander’s lucrative hedge fund expanded, Gelband sought a more prominent role and a stake. That didn’t happen. Gelband then blindsided his boss in January 2017 by abruptly quitting.

Englander and Gelband spent a good part of last year feuding over when he could start his new business and hire former colleagues. The pair resolved their dispute in December after arbitration. A person close to Gelband said the name ExodusPoint is a Biblical reference.

Gelband is now competing against his former boss and Griffin, whose businesses took decades to expand across global markets. And other multi-manager funds have shown how difficult it can be to succeed. After years of poor performance, Neil Chriss shuttered his business, while one run by Sol Kumin was taken over by another firm.

Gelband might take Jack Meyer’s experience as a cautionary tale. More than a decade after Meyer started Convexity Capital Management with such promise, it’s been blighted by investor withdrawals. As of July last year, assets were down to about half of what Meyer began with.

©2018 Bloomberg L.P.