Multi-strategy hedge funds, also known as “pod shops,” have become the hottest ticket on Wall Street. The business model is supposed to allow hedge funds to operate more efficiently. That includes deploying capital in a more productive manner and better managing risk. But how does risk management at some of the most sophisticated funds on Wall Street actually work? In this episode, we speak with Rich Falk-Wallace, formerly of Citadel and now the founder and CEO of Arcana, which provides risk management and portfolio software for multi-strat funds. We talk about how risk models are impacting investor behavior and wider markets, how multi-strat traders come up with their ideas, and the factors that go into sizing and evaluating their positions. This transcript has been lightly edited for clarity.
Key Insights from the pod:
Rich Falk-Wallace’s hedge fund experience — 6:10
The differences between traditional funds and multi-strat — 6:45
The constraints and remits of a multi-strat trader — 10:11
Sizing positions, trading costs and being factor neutral — 13:26
Why multi-strat funds turn positions over so quickly — 18:79
How do multi-strat traders generate their ideas? — 22:30
Off the shelf commercial factor models — 2746
Identifying signals that catalyze trades— 29:48
The risk of everyone using the same risk models — 35:43
The development of Arcana — 38:37
How client needs have changed over time — 41:16