The investment objective of multi-strategy hedge funds is
to deliver consistently positive returns regardless of the
directional movement in equity, interest rate or currency
markets. In general, the risk profile of the multi-strategy
classification is significantly lower than equity market risk.
By definition, multi-strategy funds engage in a variety of
investment strategies. The diversification benefits help to
smooth returns, reduce volatility and decrease asset-class
and single-strategy risks. Strategies adopted in a multi-strategy
fund may include, but are not limited to, convertible bond
arbitrage, equity long/short, statistical arbitrage and merger
Where did multi-strategy come from?
The extensive growth in hedge funds resulted from the migration
of talented and entrepreneurial investment professionals from
large asset management firms to independent, nimble, specialised
firms. The skill sets developed at the large, traditional
asset management companies could be better put to use in specialised
strategies that removed traditional market risk and provided
investors with absolute returns. Many of these specialists
built successful hedge fund businesses centred on a core competency.
As these specialist managers demonstrated the value of their
strategy by generating high, risk-adjusted returns, the demand
for their expertise grew. Managers were faced with a choice:
close their funds to new investors, or find new ways to increase
fund capacity. This search for capacity resulted in the launch
of new funds with different strategies. In some cases, managers
developed their own expertise in a new discipline, while others
chose to add talented professionals to the existing staff,
introducing additional expertise to the mix. The increased
strategy scope of hedge fund managers gave rise to the multi-strategy
hedge fund category.
What are the benefits of a multi-strategy fund?
The value of diversification in an investment portfolio has
been well documented over the years. Shifting risk to more
than one fund and/or strategy reduces the risk of the overall
investment programme. The value in multi-strategy funds is
providing the hedge fund manager with the flexibility to capitalise
on the best opportunities in his varied skill set. Single-strategy
funds are limited in the scope of their investment opportunities.
When the inefficiencies in a specific expertise of a single-strategy
fund wane, managers may reduce exposure by shifting into cash
or remain invested in sub-optimal opportunities. Multi-strategy
funds can allocate capital away from less-attractive strategies
to those that offer superior opportunities. Moreover, multi-strategy
funds can offer investors considerable capacity as investor
capital is allocated across several strategies.
Multi-strategy funds are not managed by those with merely
mediocre skills in a variety of strategies. Rather, successful
multi-strategy managers have developed "best of breed"
investment programmes in each of his strategies. Flexibility,
capacity and high risk-adjusted returns are some of the benefits
of multi-strategy funds.
What are the unique risks to multi-strategy funds?
Seldom will multi-strategy funds be the best performing category
of hedge funds over a short-term time horizon. Diversification
of strategies will water down the returns of a single strategy
during a very "hot" period. An example might be
if convertible bond arbitrage performs exceptionally well
during a 12-month period, while equity long/short delivers
acceptable returns. Convertible bond arbitrage managers will
outperform multi-strategy managers who engage in both disciplines.
During a longer time period, when convertible-bond arbitrage
falls out of favour while equity long/short performs very
well, multi-strategy managers may outperform convertible bond
funds but underperform equity long/short managers. In the
long term, however, the consistency and performance of multi-strategy
funds should prove their worth, delivering low volatility,
and high risk-adjusted returns both in absolute and relative
Multi-strategy funds can offer investors access to a variety
of strategies, provide considerable capacity and enhance the
risk-adjusted returns of a diversified or concentrated investment