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By Nell Mackenzie LONDON (Reuters) -Eisler Capital's decision to close its flagship multi-strategy hedge fund as soaring staff costs eroded trading profit exposes the difficulty London-based funds face when trying to grow rapidly and replicate bigger, entrenched U.S. players, investors and industry insiders say. They warn that flows in the $4 trillion hedge fund sector will increasingly be absorbed by incumbents – likely leaving an industry that runs on public pension and retirement money concentrated in the hands of a few big firms with an outsized impact on financial markets. Eisler said last week that it would shut just four years after it pivoted to try and emulate the kind of business model used by the most renowned U.S. headquartered multi-strategy hedge funds such as Citadel, Balyasny and Millennium Management that trade different strategies under one roof. Crucially, Eisler also changed how it charged investors, adopting a pass-through fee structure, where costs take a bite out of trading returns. At Eisler, this meant that on top of a 15-20% performance fee, investors paid the hedge fund's expenses and compensation costs, an investor document seen by Reuters showed.   Eisler's turnover climbed by over 40% between 2023 and 2024, a Reuters analysis of the hedge fund's publicly reported accounts showed. But its staff costs grew much faster, over 900% in five years, outpacing its ability to retain profit and leaving investors with smaller and smaller net returns.  "Multi-strats strike me as the final frontier…what percentage take of gross profits can we squeeze investors on without losing them?" asked hedge fund investor Harald Berlinicke, CIO of Berlin-based Max-Berlinicke-Erben Family Office. "It's not an easy balancing act to get right for a new kid on the block as the sky-high fees the established players can charge gives them an edge in terms of attracting the right talent."  A representative for Eisler Capital declined to comment. Citadel, Balyasny and Millennium also declined to comment. In its last investor letter in October, Eisler highlighted the burden of compensation costs.  Portfolio managers are the most expensive they have ever been, three recruitment professionals, who wished to remain anonymous, told Reuters. They mentioned direct knowledge of star fund managers hired in New York and London this year on salaries of over $100 million, which can prove costly for investors if not offset by stellar trading returns.  BLAME THE MODEL? Investors in pass-through funds receive less than half of the trading spoils, according to Barclays research. While they may have been content with that when multi-manager funds were outperforming the wider industry, net returns have now fallen just short of peers with fixed charges, Barclays said in a July client note. Pass-through fees have, however, traditionally been too rich for some European pension funds. "In Europe, some of the world’s largest and most prestigious pension funds have stated they prefer to invest in lower net returning managers with lower fees than higher net returning managers with higher fees," said Michael Oliver Weinberg, deputy CIO of a family office and previously at Dutch pension fund manager APG.  London is home to large and well-performing hedge funds, not necessarily all multi-strats but still successful, including Rokos Capital Management and Marshall Wace.   The partial pass-through model, seen with Man Group's 1783 Strategies fund, operates as a product included in a wider group of funds, some with lower fees.  Man Group, Rokos Capital Management and Marshall Wace declined to comment.  Berlinicke said that while some investors may give established pass-through funds the benefit of the doubt, that might not be true for newer entrants given the level of the fees.  Meanwhile, one effect of the growing sway of multi-strategy funds was that stock price swings on earnings days in 2024 were the largest since at least 2016, a Reuters analysis showed.  NEW YORK, NEW YORK  New York has been the centre of the multi-manager model with pass-through fees and that won't change, investors said.  London, the second largest hedge fund centre, has 171 hedge fund managers, compared to 911 in New York, a city which has accounted for roughly 85% of hedge funds consistently for the last five years, data from hedge fund research firm PivotalPath shows.  Other centres such as Dubai and Abu Dhabi are also emerging as rivals.  "Crowding in markets has always been something to watch out for," said Berlinicke. "The question is whether large players grow and will that be a problem for markets? Possibly, if they dominate strategies or certain parts of the market."  (Reporting by Nell Mackenzie; Editing by Dhara Ranasinghe and Kirsten Donovan)

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LONDON/NEW YORK (Reuters) -U.S. President Donald Trump on Friday said he is calculating a massive increase in tariffs on Chinese imports, adding there was no reason to meet with President Xi JinPing in two weeks as planned, triggering a sell-off in the dollar.  China this week has tightened restrictions on exports of key rare earth materials and, separately, on Friday said it would impose extra port fees on U.S. ships from October 14. MARKET REACTION: STOCKS: US stocks fell sharply after Trump's comments on China.. S&P 500 down 1.6% while Nasdaq sank 2.2% BONDS: U.S. Treasury yields fell, with the yield on the benchmark U.S. 10-year note down 9 basis points at 4.059%. FOREX: The dollar index dropped 0.5% to 98.87. COMMENTS:  JUAN PEREZ, DIRECTOR OF TRADING, MONEX USA, WASHINGTON: “It sends a message of negativity. What markets, for the most part, and investors need is a little bit clearer guidance, especially when trying to figure out if the Federal Reserve is going to deliver what they want, which is 50 basis points slashed off the interest rate for the remainder of the year.” “It brings, once again, to the table and to the spotlight that the United States is acting unilaterally to try to align trade and to try to get countries to align with trade. So ultimately, it does create a lot of negativity for the U.S. economy. It creates doubt about, where is this all going? What is the purpose? Is China really going to have to be very retaliatory moving forward in order to get the United States to negotiate better? So it creates a lot of doubt.” CHRIS SCICLUNA, HEAD OF RESEARCH, DAIWA CAPITAL MARKETS, LONDON: “It’s difficult to know how to respond to this (the Trump comments). The temptation, given what’s happened since the start of the year and the resilience of markets, is to fade these announcements and take this with a pinch of salt what he’s saying. We’ll have to see what the substance is.” BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN: "It’s fuel on the fire. For a while it looked like things were going well between Trump and Xi, but China’s latest export controls on rare earth minerals set Trump off. A lot can happen between now and the APEC summit where they were supposed to meet, so it wouldn’t be surprising to see tempers cool before then. STEVE SOSNICK, CHIEF MARKET ANALYST, INTERACTIVE BROKERS, CONNECTICUT: "The president's comments are not are obviously not helpful for the market. We finally got through the worst of the tariff concerns and now we find ourselves once again faced with another round of them and the tone of his comments was certainly quite aggressive – massive tariffs being threatened and no reason to talk to him (Xi). So this is definitely going in the wrong direction about U.S. China trade relations. It's definitely not a market friendly move and considering how quickly the market is selling off on this." ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, CONNECTICUT: "He's (Trump's) caught the market off guard again and thrown more question marks into a market that is being questioned about a very high degree of enthusiasm and being sort of scrutinized for having too much fluff built into it. Then Trump comes out with this surprise announcement, so you have a market that hit an air pocket and is selling off a little bit. When you reacted to it in the past, it's come back and burned you. Do you sell out of this market because of this? It's a giant question mark. It just creates more questions and volatility in the market." MIKE BROWN, SENIOR RESEARCH STRATEGIST,  PEPPERSTONE, LONDON: "It’s a bolt from the blue from Trump and after the rare earth news earlier … the timing is a big surprise. I would say as always with Trump and I think the market has learned this now, it’s difficult to determine what is the bluster and rhetoric and what he might follow through on. The key thing market participants will be focused on as we move into the weekend and next week, is: are we now looking at having to tear up the assumptions we did have that trade was a done deal and now look at a re-escalation of tensions between the two. If we are, and talks are in jeopardy, you are looking at a fairly chunky leg lower in risk in the days and weeks ahead." (Reporting by EMEA, New York Markets Teams; Compiled by Amanda Cooper; Editing by Dhara Ranasinghe)

(The article has been published through a syndicated feed. Except for the headline, the content has been published verbatim. Liability lies with original publisher.)