Crestline Summit
For some hedge funds, a cash hurdle is seen as an olive branch to antsy investors frustrated by dwindling returns. For others, such as the $3 billion hedge-fund platform Crestline Summit, it is a part of their expansion plans.
The Texas-based manager launched its multi-strategy offering in 2015 out of the firm's existing fund-of-funds business. In May, it launched a leveraged version of its flagship stable value strategy, offering investors in its three strategies a cash hurdle for performance fees.
The firm still charges management fees to cover operating expenses and pass-through fees to pay its 30 portfolio managers. The cash hurdle, which means they only get paid for performance above Treasury bills, also comes with more of a payout for the firm if the manager significantly outperforms.
"There's alignment with forward-thinking LPs who don't want to put the portfolio managers or the fund managers in such a position that they don't make money," said Caroline Cooley, Crestline Summit's chief investment officer.
"There is a give-and-take where we're not going to charge on the interest-rate component of the return, but we will charge a higher rate for the alpha component of the return."
Cash hurdles are expected to be more common thanks to higher interest rates and vocal allocators such as the Teacher Retirement System of Texas, which led a group of dozens of investors to call for such fee agreements in an open letter earlier this year. ExodusPoint, the New York-based fund run by Michael Gelband, has been the most prominent hedge fund to adopt such a structure so far.
But the hurdles are just one element of Crestline's overall plans. This business, which is part of a broader $18 billion alternatives manager, is "in expansion mode, full stop," according to Neilson Arbour, the deputy chief investment officer of Crestline Summit. The manager plans to add up to four more PMs this year. While the battle for talent among multimanagers is not cheap, the firm hopes its flexibility will win over PMs.
"We're at this inflection point, this escape velocity, of where the business is and where we see it growing to, and we're excited about that," Arbour said.
With a bet-on-themselves fee structure, the firm believes it can attract capital, and its newest offering includes backing from the massive pension fund Texas Teachers.
But the culture is why leaders believe talent will come.
"We have to pay competitive rates for people. But we also recognize that in a world where everyone has a job, people take jobs for lots of different reasons, of which pay is one of them," Cooley said.
As Arbour put it, "capital and economics are commoditized to a point."
Crestline believes it is more flexible with PMs than larger pod peers. Roughly half of its PMs operate externally, meaning they're able to raise additional capital alongside Crestline's investment. One such manager is former Citadel PM Josh White, who started trading at his London-based Regents Gate earlier this year with capital from Crestline.
"It might enable you to find the person that's been kind of a cog in the wheel of a platform for all of their life, and now they want their name on the door," Cooley said of allowing external PMs.
"We don't want to pass that man or woman up from joining us and being a real contributor to the program."
While being external doesn't mean there are different risk limits, it does give some more entrepreneurial investors the chance to try their hand at business building. And though the firm might not offer the largest compensation guarantee, executives believe the overall package is compelling.
"Some of our competitors are kind of an indentured servitude model," said Scott Nelson, who runs the client partnership group.
"What we've tried to do, candidly, is be people that those portfolio managers who are very good, who have options, choose to work with."
The brand the firm is trying to push externally is that they are "capital partners, not capital providers," Nelson said.
Structuring risk limits around the certain type of strategies a PM runs, for example, is proof they don't see themselves as a one-size-fits-all, executives say, and the firm's performance has kept pace with larger rivals.
A person familiar with the manager's flagship strategy said Crestline was up nearly 12% in 2023, besting funds such as Point72 and Millennium. This year, the strategy is up 5.8% through August.
"There are some structural elements to how we engage that is, we think, a more balanced, fair approach than some of our competitors," Nelson said.
"The overall package has allowed us to punch well above our weight."
