Investing in hedge funds is challenging as both strategies and fund structures are complex. Almost all strategies are cyclical, although not all are on the same cycle. For example, statistical arbitrage tends to perform best when volatility is high, however, that represents a poor environment for long-short equity strategies with a value bias. The performance drivers are relatively clear for some strategies, but far less obvious for others like CTAs.
Creating and managing a dedicated team of hedge fund analysts is expensive and time-consuming, which makes it viable for only the largest asset managers. An alternative option is hiring investment consultants, however, there is plenty of evidence that these do not add much value to the strategy selection process. The key issue seems to be that these primarily recommend the largest and most successful funds in order to minimise their own career risk, which essentially represents performance chasing (Jenkinson et al). Given a lack of performance consistency, this approach tends to result in poor returns.
Asset allocators can also outsource the strategy selection process to hedge fund managers by investing in multi-strategy hedge funds. Theoretically, these should have fewer conflicts of interest and superior knowledge of the different hedge fund strategies as well as their performance drivers.
In this short research note, we will explore the performance and characteristics of multi-strategy hedge funds.
Commercial success of multi-strategy hedge funds
The assets under management in the hedge fund industry have increased by approximately 10% per annum from $1.4 to $3.4trn in the period between 2011 and 2020. Multi-strategy hedge funds also gained assets over that period, but their market share decreased from 13% to 10%.
Given that the number of hedge fund strategies continues to increase, e.g. the fairly new cryptocurrency funds, the complexity of hedge fund investing has not reduced. From this perspective, it is somewhat unusual that multi-strategy funds have not managed to exploit their expertise and gained market share.
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March 16, 2021 at 03:18PM
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Analysis Multi-strategy hedge funds: Equity in a different shade? - ETF Stream
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