Over the last decade, a quiet revolution has taken place in the world of absolute-return investing. Once the preserve of single-manager hedge funds, who were later overtaken by the boom in funds of hedge funds and a handful of diversified multi-asset players, the space has been reshaped by the rise of the multi-strategy behemoths of the US – the so-called ‘pod shops’.
Names such as Balyasny, Citadel, Millennium and Point72 now dominate the sector, the associated headlines and, seemingly, asset flows – attracting billions from institutional allocators seeking stable, diversified returns without the existential risk of even a single star manager falling from grace.
On the face of it, this makes perfect sense. In the absolute-return world, relying on a single individual or team to deliver consistent, uncorrelated alpha is a gamble. If they lose their edge, take the wrong macro view or simply have a bad run, returns can quickly unravel .
The pod shops – in theory, at least – solve this worry by deploying capital across dozens, sometimes hundreds, of independently-run trading teams, each operating within strict risk parameters. For many investors, this appears to be a simple yet perfect antidote to one of the sector’s most recognised flaws – and, on that principle, we are in full agreement. Yet beneath the surface lies a different set of challenges that cannot be ignored.
Capturing investors’ imagination
The pod-shop model is simple in principle but highly complex in execution, with a central management company allocating risk capital to multiple investment teams. These ‘pods’ are semi-autonomous trading teams specialising in specific strategies, asset classes or geographies. Each pod has its own P&L, risk limits and incentives, with the central firm providing infrastructure, compliance, technology and often centralised funding.
The appeal is clear:
* Diversification of manager risk: No single blow-up should sink the ship.
* Stable return targets: Most pod shops aim for high single-digit to low double-digit returns with low volatility.
* Rigorous risk management: Central oversight ensures tight control of exposures and drawdowns.
* Institutional-grade infrastructure: A level of operational and technological sophistication few stand-alone hedge funds can match.
It is hardly any wonder then that institutional allocators have poured capital in – particularly US pensions and endowments searching for steady returns in a low-yield world. According to Alternative Fund Insight, by the first quarter of 2025, the multi-strategy (pod shop) segment of the hedge fund industry was managing an estimated $931bn (£687bn) – a scale that underscores both their popularity and their growing influence.
‘Single manager’ problem
In absolute-return investing, concentration risk is often invisible until it is too late. Star managers can build stellar track records, attract billions and then, through bad calls, hubris or simple mean reversion, give back years of gains in a few painful quarters.
Unfortunately this cycle, particularly in the UK, has soured investor appetite – and patience – for absolute return funds. Indeed, we now seem to be calling these vehicles ‘liquid alternatives’ – as if the absolute return label has been tainted by the many high-profile disappointments and disasters that have gone before.
By allocating across dozens of individual teams, each with tight risk budgets, the pod shop model dilutes the impact of any one manager’s poor performance. If one pod misfires, another may offset the loss.”
Meanwhile, by allocating across dozens of individual teams, each with tight risk budgets, the pod shop model dilutes the impact of any one manager’s poor performance. If one pod misfires, another may offset the loss.
Again, this is a concept with which we agree wholeheartedly. At Apollo, we have long argued an absolute return allocation should never hinge on a single person or strategy. The beauty of a genuinely diversified multi-strategy, multi-manager approach is it harnesses the collective skill of different teams, styles and time horizons, producing something greater than the sum of its parts.
On this point, then, the pod shops and our own approach are philosophically aligned – however, from hereon, our paths diverge sharply.
Other side of the story
While the headlines may focus on eye-popping profits and impressive Sharpe ratios, pod shops do come with trade-offs, such as the following, which tend not to be dwelt upon in the accompanying marketing material:
* Cost: These are by no means cheap vehicles to invest in. Management fees, performance fees and internal pod-level incentives mean the total expense ratio can be staggering. For the allocator, net returns are often materially lower than the gross figures splashed in press coverage.
* Liquidity & ‘lock-ups’: Daily dealing? Forget it. Many pod shops impose annual or multi-year lock-ups, with quarterly or semi-annual redemption windows. We also know that times of stress can lead to lengthy lock-ups as investors all try to leave at the same time. For investors who value flexibility, rebalancing agility and control over their liquidity, then, this is a serious drawback.
* Capacity constraints: The very scale that makes pod shops operationally formidable can also dilute alpha. As assets swell into the tens of billions, the opportunity set narrows. Returns can remain respectable, of course, but the days of outsized alpha generation are often in the past.
* Opacity: Pod shops are famously secretive. Allocators receive high-level performance reports but granular transparency is rare. Understanding exactly where your risk lies, and how it might behave in extreme scenarios, can be challenging.
Why this matters now
The timing for this discussion is not accidental. Absolute return strategies have performed well in the last 18 months, attracting renewed allocator interest. We are seeing new launches into the space and more and more exposure to these strategies in the press, in wider marketing efforts and at investment conferences.
In parallel, we have seen a marked shift in allocator behaviour over the last decade. Family offices, pension funds and other institutional investors have steadily increased allocations to alternative asset classes such as private equity, private debt, infrastructure and real assets.
The motivation is clear: to diversify beyond the traditional equity and bond mix, reduce reliance on public market beta and tap into differentiated sources of return. This willingness to look outside the conventional portfolio building blocks has also rekindled interest in absolute return strategies.
Pod shops are in vogue right now – that does not mean they are the only, or the best, way to access diversified alpha.”
Allocators that have already embraced illiquid alternatives are often more open to exploring liquid, market-neutral approaches – particularly those that can deliver equity-like returns with bond-like volatility, and without locking up capital for years. The renewed appetite for diversification has been a tailwind for the sector’s growth in recent years.
Yet history tells us investors tend to chase recent winners, often committing capital to strategies that have already reached peak capacity or where structural risks are overlooked in the rush to deploy. Pod shops are in vogue right now – that does not mean they are the only, or the best, way to access diversified alpha.
Multi-strategy’s future
The core lesson the pod shops have reinforced is an important one: in absolute return investing, manager concentration is a risk you can avoid. Whether you achieve that diversification through an internal pod model or an external fund-of-funds structure is a question of trade-offs.
For our part, we believe the combination of manager diversification, liquidity and cost discipline is where the sweet spot lies. An unfettered approach lets us back the best managers in each niche, adapt allocations as conditions change and keep investor capital accessible at all times.
The rise of the US pod shops has been a fascinating chapter in the evolution of the absolute return sector – showing what is possible when you marry diversification with operational muscle. At the same time, however, they have highlighted the pitfalls of concentration at the firm level, and the compromises that can come with scale, illiquidity and cost.
For investors willing to look beyond the headlines, there are alternative ways to achieve the same diversification benefits and, in some cases, even better outcomes. First, however, investors need to embrace the sector and understand these better outcomes tend to come through diversification, rather than a one stop (pod) shop.
Ian Willings is a portfolio manager and partner at Apollo Multi Asset Management, experts in researching and investing in absolute return and liquid alternative strategies. CIO Steve Brann is the author of Absolute Vision, a book that sets out the thinking behind the firm’s strategy and looks to demystify the asset class for a wider audience.
