The gap between the cheapest and most expensive stocks is close to its widest level for fifty years (see Chart 1). While passive investing has played a role in this market distortion, there is another force reshaping markets that receives far less attention: the growth of multi-manager hedge funds, commonly known as ‘pod shops’.
Chart 1: MSCI World value vs growth, average valuation premium
Source: Morgan Stanley, 30 Apr 2025. Past performance is not a guide to the future.
These pod shops operate as platforms that allocate capital to many independent portfolio managers, each running their own strategies with a sector or event-driven focus. The parent fund enforces strict risk controls such as tight stop-loss limits and intraday monitoring, while maintaining market neutrality to allow the parent fund to gear up the strategies.
This structure is designed to deliver consistent, low volatility returns regardless of broader market moves, making pod shops especially attractive to institutional investors seeking stable performance in a low-return world.
Their scale is unprecedented. Citadel and Millenium, the two largest firms, manage $65bn and $73bn1, respectively. Citadel employs around 3,000 employees, less than half of which are investment professionals, whilst Millennium has over 6,000 employees, around half of which are investment professionals2. The collective headcount of pod shops has tripled since 2015, underscoring their meteoric rise3.
But it is their leverage that magnifies their influence beyond what their AUM suggest. Data from the Office of Financial Research (OFR) illustrates that the gross leverage of multi-strategy funds including pod shops has risen from 4x a decade ago to 12x today, while their net leverage has risen from 2x to around 4.5x today4. Combined with high turnover and tight risk controls, pod shops now account for over 30% of US equity trading volume5. They have become the marginal price-setters in the stocks they trade, their flows and reactions shaping intraday and event-driven volatility.
Impact on valuations
Here is where it gets interesting for long term investors: Pod shops operate on short-term horizons. Many penalise managers for holding positions longer than a set period (often 30 days), pushing towards rapid turnover and event-driven trading. This creates a powerful incentive to focus on catalyst events – earnings releases, guidance updates, analyst estimate revisions and regulatory news – that move prices immediately.
Valuation becomes almost completely irrelevant. Their focus is momentum and trend, not whether a company is cheap or expensive relative to intrinsic worth. We can see this trend in action when a pod starts shorting a high-quality company on the basis that the next quarter will disappoint.
The earnings frenzy
Pod shops respond to corporate events within minutes of news releases. Their structure of multiple independent teams, each armed with sophisticated data and analytics, allows instant repositioning. Risk controls further incentivise rapid moves as pods that are slow to react risk underperforming and losing capital allocations.
This has created a market where responses to earnings surprises are both faster and more violent than in the past. Stocks beating expectations see immediate, sharp rallies as pods pile in, while disappointments trigger precipitous drops as pods race to exit or short positions. The effect is most pronounced in the most liquid, widely followed stocks where pod shop activity is most concentrated.
For long-term investors, this creates both frustration and opportunity. It can be alarming to watch companies plummet on a small quarterly earnings miss despite already trading at very low valuations. This sense of frustration was echoed by US value investor Harris Kupperman6 in a recent blog: “I’m genuinely amazed at how these pods will short high-quality, rapidly growing businesses … just because the next quarter will be weak.”
The value investor’s opportunity
If you believe that share prices will eventually be driven by fundamentals and move towards intrinsic value, pod shop influence creates an opportunity. As prices are driven further from intrinsic value, future return potential for valuation-driven investors increases.
The momentum oriented, valuation-agnostic approach provides us with an opportunity to buy quality companies at very low valuations – the very essence of value investing. Recent takeovers and the surge in share buybacks suggests that we may have reached valuation floors, prompting other market participants to step in and exploit these anomalies. This dynamic may presage a better environment for value investing generally.
The rise of pod shops represents a fundamental shift in markets. When combined with passive investing's growth, we're witnessing unprecedented concentration of capital in strategies completely indifferent to valuation.
While valuation may no longer matter to the market's biggest hedge funds, it still matters for long-term wealth creation. For patient investors willing to buy quality businesses at reasonable prices, the current environment may prove rewarding.
Ian Lance is a partner and fund manager in the Redwheel value & income team. The views expressed above should not be taken an investment advice.
1 Source: corporate websites. April, 2025
2 Source: Rupak’s Substack. April, 2025
3 Source: GSAM. April, 2024
4 Source: Rupak’s Substack. April, 2025
5 Source: NSPGroup. March, 2024
6 Harris Kupperman is the founder of Praetorian Capital Management LLC, an investment manager focused on using inflecting trends to guide stock selection and event-driven strategies. Mr. Kupperman is also the author of Praetorian Capital’s public blog, Kuppy’s Korner