Is multi-strategy hedge fund the right option? | Paragon Alpha

Is multi-strategy hedge fund the right option?

By Matthew Levy

Is a multi-strategy hedge fund the right option?

According to a recent survey, about 31% of investors intended to raise their multi-strategy allocation in the second half of 2021, or 25% greater than in the first half of 2021. This highlighted the adaptability of multi-strategy hedge funds in the anticipated market scenario.

Figure 1: Investors' increased allocation per hedge funds categories. Source: HFM-AIMA

And this tendency shows no signs of abating, and that is understandable; During recent economically tumultuous times, multi-hedge funds have demonstrated a solid performance. In April 2022, SureFire Capital's multi-strategy hedge fund outperformed the S&P 500 and Nasdaq 100 indices by achieving a return surpassing 22,2%. To achieve this result, the fund utilized a beta approach and concentrated on the trend, momentum, and volatility components of the S&P 500.

On a more general scale, according to Aurum, a hedge fund investment specialist, the performance of multi-strategy funds has been consistently positive, ranking it as the second-best performing strategy over the past year.

Figure 2: Multi-strategy net return (2021). Source: Aurum

Nonetheless, multi-strategy funds encompass several risks. One of the risks of multi-strategy hedge funds is the difficulty of monitoring portfolio risk. While the employment of several portfolio management teams helps to diversify the portfolio, the teams are sometimes walled to their own strategies, making it difficult to describe each team's influence on the portfolio as a whole and to identify any overlaps. Frequently, the manager of several strategies will collaborate with the risk management team to create criteria for each risk management team. Consequently, each manager has a theoretically distinct set of portfolio principles and restrictions. Due to the difficulties of aggregating risks at the individual portfolio level, this structure might also diminish the amount of transparency an investor can enjoy.

In addition, the pooling of resources inside the multi-strategy fund may provide investors with an operational risk: Each team in multi-strategy hedge funds shares the fund's resources and relies on the firm's operational ability to execute its plan. If the infrastructure of the multi-strategy company is inadequate, the investor is exposed to this risk.

Multi-strategy for the Long Term

Over the years, the importance of a diversified, multi-strategy investment has been well proven – Total investment risk can be reduced by spreading it across a number of different strategies. The potential of multi-strategy funds to capitalize on the most successful market approach is the primary benefit of investing in these types of products.

In a nutshell, investors should consider multi-strategy hedge funds as a potential solution to the simple issue of generating consistent portfolio returns. By employing uncorrelated strategies, multi-strategy hedge funds can improve a portfolio's risk-adjusted returns through diversification while increasing its resiliency characteristics during times of turmoil.

Investors are recommended to thoroughly examine funds and strategies to determine which method is best suited to their needs, as some funds' objectives may differ from their own. They may, for example, invest in an aggressive plan when a more prudent approach would be preferable. On the other side, if they take an overly cautious approach, they may find it more difficult to attain their long-term objectives.


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