$11 billion ExodusPoint just made a concession on fees. It could be the start of a massive change for hedge funds' biggest names.

• $11 billion ExodusPoint created a new share class that yields performance fees only if it beats T-bills.
• So far, the manager is the biggest name in the space to adopt a so-called cash hurdle.
• Given higher interest rates and less demand for multi-strategy funds, allocators expect this to spread.

The clear winners within the hedge-fund world during the pandemic and the years immediately following 2020 were the industry's largest and most complicated.

Multi-strategy hedge funds, led by Citadel, Millennium, and Point72, had churned out returns in turbulent markets with limited volatility. In 2022, when markets took a nosedive and growth-oriented funds like Tiger Global and Coatue plummeted, these managers were up, leading to an avalanche of demand from institutional investors desperate for returns.

In that environment, even the multi-strategy funds not among the sector's top tier were able to demand long lock-ups and high fees. Many of these expensive managers have since struggled to produce returns that offset soaring talent and technology expenses — and their backers are finally getting some leverage.

ExodusPoint, the $11 billion manager run by former Millennium executive Michael Gelband, is rolling out a new share class for investors that will tie performance fees to short-term Treasury yields, a person close to the firm said. The Wall Street Journal previously reported this move.

The new share class, which will be retroactive to the start of 2024, still charges management fees and a pass-through fee and has a longer lock-up period than previous share classes.

While some industry insiders see this as a siloed move that reflects the poor relative performance of ExodusPoint instead of an industry-wide shift — the firm is up 4.6% through August compared to gains of more than 18% by the S&P 500 over the same time — it's hard to deny that multi-strategy funds have lost leverage. A recent Goldman Sachs report seen by the FT states that more than $30 billion have been redeemed from these managers from June 2023 through this June — the first time the sector has experienced outflows since 2016.

"There has been a turn in allocator sentiment and the flows picture reflects this lower appetite," the report reads.

The effects of this diminished interest are already apparent. Bobby Jain's new fund launched with $5.3 billion in July after there were whispers of him raising $10 billion six months prior. Former Point72 president Doug Haynes disbanded his yet-to-launch Norias Research this month thanks to fundraising trouble, Bloomberg reported.

And LPs have seized on this momentum, especially in the face of ever-rising costs that eat into their end returns. Higher interest rates mean institutional investors need their managers to beat a higher benchmark than five years ago to be worth the risk.

This came to a head in May when a group of more than 50 allocators, led by massive pension and ExodusPoint investor Teacher Retirement System of Texas, published an open letter calling for their hedge funds to adopt fee hurdles. Some allocators believe ExodusPoint's decision — which forces the firm to outperform the 13-week Treasury note's yield, which is currently just under 5% — to follow their recommendation is just the start.

"I suspect things will happen on a case-by-case basis as poor-performing funds with antsy investors make a peace offering to buy a little more runway," said Justin Young, the director of investments at Multilateral Endowment Management Company, an allocator that works with foundations and endowments such as the Oklahoma State Foundation, on LinkedIn.

"It will take time, but assuming a 10-15% shift each year, it will be industry standard again soon. The very best funds will still be able to dictate their own terms as supply outweighs demand, but with worse economics, the net returns will compress a bit, narrowing the gap."