Published on September 24, 2024

The Case for Multi-Strategy Funds

Introduction

When building a hedge fund portfolio, a multi-strategy fund can be a great tool. They have the advantage of being diversified on the strategy level, like a fund of funds, but do not require investors to undertake the additional fees. Multi-strategy hedge funds are designed to deploy a range of investment approaches within a single fund, such as equity long/short, event-driven, arbitrage, credit, and macro strategies. This diversification allows them to balance risk versus reward and reduce overall portfolio volatility. These funds' flexible capital allocation is a key feature, enabling them to shift resources dynamically across different strategies based on evolving market conditions and opportunities. By doing so, they aim to deliver more consistent returns while managing downside risk. These funds typically have significant assets under management, overseeing tens of billions of dollars. Managing multiple strategies within a single fund requires sophisticated technology and infrastructure, specialized teams, and robust risk management. These funds' adaptability and diversified nature make them attractive across various market environments, offering resilience in bullish and bearish conditions.1

Multi-Strategy Hedge Fund: Assets Under Management ($ Billions)

The Case for Hedge Funds Multi-Strategy: Chart of Multi-Strategy Hedge Funds: Assets Under Management ($ Billions)

Source: BarclayHedge

Scale and Technology

Established multi-strategy funds have the advantage of fully built-out technology and research platforms to support their PM teams. Hedge Funds increasingly use alternative data sources like social media posting, credit card data, and others to help make more informed investment decisions.2 This information can be expensive to access and requires technology infrastructure to process and analyze the data before it can be effectively used to inform investment decisions. Unsurprisingly, multi-strategy funds have an advantage here because the data purchased can be used by more than one team, and due to their scale and human capital, they can integrate vast data sets throughout the organization.

Talent Attraction

Multi-strategy funds work very hard to attract talent into their ecosystems. Their pitch is normally based on the idea that PMs can plug into an existing, best-in-class, organization rather than doing it alone. Additionally, from a capital raising perspective, PMs may have faster access to capital as the fund may have already raised additional capital that can be deployed. 1

Multi-Strategy Funds Right Now

Within the hedge fund industry, many multi-strategy assets have accrued to the larger players in the space. According to Barclays ' prime brokerage research, only seven multi-manager hedge funds manage assets of more than $10 billion. Of 47 multi-manager funds the bank tracks, 32 oversee less than $5 billion in assets. (Footnote 3) While additional consolidation is likely, we have seen the multi-strategy space welcome new entrants that could scale quickly if they can raise sufficient assets, which might be a big “if.”4

Market Share of Multi-Strategy Funds in Hedge Fund Universe

Source: Multi-Strategy Hedge Funds: Jack of All Trades, or Master of None? | Portfolio for the Future | CAIA

We expect the trend of multi-strategy funds attracting more talent to continue. According to research done by Preqin, of the total 78,500 employees at hedge funds in total, about 55,000 are working at multi-strategy funds.

Conclusion

Anecdotally, we have seen many advisors utilize multi-strategy funds as a core hedge fund allocation for their clients’ portfolios. These strategies provide broad exposure to many different types of investment opportunities, specifically by allocating to sub-strategies like distressed debt, activism, and arbitrage. Multi-strategy funds, in the aggregate, tend to exhibit low correlation to traditional markets, and with built-in diversification benefits and risk management protocols, they can help provide consistent returns over time.

Sources: