Major global hedge funds are turning their focus to a novel talent strategy: purchasing investment ideas from portfolio managers at smaller firms.

Companies like Citadel and Point72 Asset Management have become dominant forces in the industry by generating market-beating returns (alpha) through numerous internal investment teams. The success of this model has helped them amass unprecedented amounts of capital, while also igniting a costly war for talent.

Now, these multi-strategy giants are targeting one of the few underutilized resources: external brainpower. This increasingly means they are willing to pay for alpha signals from the "buy side," seeking original trade ideas from smaller fund managers who are either too niche or too independent to be recruited directly.

Marcus Storr, head of alternative investments at German asset manager FERI, stated, "Ten years ago, they just wanted to poach the talent. Today, they are also happy to rent that talent."

According to informed sources, Balyasny Asset Management and Millennium Management are among the latest giants considering obtaining trade signals from other hedge funds.

Some sources, who requested anonymity due to the private nature of the discussions, revealed that Balyasny is in preliminary talks regarding compensating external fund managers for submitting investment ideas. Other sources indicated that Millennium has engaged Old Farm Partners, a specialist in hedge fund investments, to help identify buy-side fund managers who might participate in its related program. Representatives for Balyasny and Millennium declined to comment, and Old Farm Partners did not respond to requests for comment.

Relying on external parties for excess returns has drawn regulatory scrutiny in the past. For smaller firms, selling investment ideas can also represent a difficult trade-off.

Nevertheless, many are still willing to participate. A JPMorgan survey found that among hedge fund managers with assets under management below $500 million, approximately 14% have shared or currently share trade ideas. The survey, published in January and involving 127 fund managers, showed that half would consider doing so.

Guy Saintfiet, Head of Fund Management for Europe, the Middle East, and Africa at Aon Investments Ltd., noted that large hedge funds are growing ever larger. They are sitting on substantial cash and are under pressure to find suitable investment targets.

Saintfiet added that smaller firms are in a tough position, with many now managing money through separately managed accounts (SMAs) that charge performance fees but not management fees. They need any source of additional revenue they can find.