Multi-strategy hedge funds - the best strategy | Paragon Alpha | Paragon Alpha

The rise of Multi-Strategy Hedge Funds, and why would you choose it as a strategy?

By Matthew Levy

Due to the current market turbulence, many investors are at a loss as to how to allocate their assets. Multi-strategy hedge funds and their diverse investment methods are on the rise and may represent an optimal answer in this environment.

This article will provide a comprehensive introduction to one of the most attractive hedge fund strategies.

What is a Multi-Strategy Hedge Fund?

A multi-strategy hedge strategy combines various uncorrelated investment methods, such as stocks, bonds, real estate, and cash, to create a portfolio that is more flexible and diversified, hence giving investors with a more reliable return stream. Multi-strategy hedge funds are widely recognized as the most diversified portfolios in the segment.

Typically, each investment strategy is implemented by a portfolio manager committed to that approach. Moreover, depending on the latter, these tactics may be narrowly or broadly defined.

Multi-strategy funds may operate under a single manager model or a multi-manager one.

  • In the single manager model, the company's management will be more active in stock selection. As the inefficiencies of a single-strategy fund's specialized knowledge diminish, managers may lessen their exposure by shifting into cash or continue to invest in suboptimal possibilities.
  • In the multi-manager approach, after an allocation to a strategy or sector has been made, the PM normally has complete discretion within the investment universe it has specified. Additionally, multi-strategy funds may provide investors with substantial capacity, since their cash is distributed across numerous strategies.

Capital may be allocated dynamically in both models as opportunities change.

Why choose multi-strategy hedge funds?

First and foremost, diversification. Diversification in a portfolio of investments has been widely established throughout the years. Transferring risk to numerous funds and/or strategies lowers the program's total risk. Multi-strategy hedge funds are the best positioned for this purpose. Accordingly, these strategies display low beta, meaning the return of the portfolio is less dependent on the market conditions which makes it a more resilient option.

Furthermore, multi-strategy funds use a centralized risk management methodology to properly provide a single perspective of all different risks. This provides investors with a much better picture of their portfolio's total risk and enables them to make more conscious decisions. In addition, investors may benefit from the knowledge and experience of a central risk management team, which they may not have on their own.

Access to strategies is another main advantage - multi-strategy funds can facilitate investors' access to new strategies, thus decreasing the need for time-intensive due diligence. Similarly, by centralizing trading and portfolio administration, a multi-strategy portfolio should be able to dramatically cut trading expenses in comparison to distinct strategies managed by many managers.

Lastly, investing in a single vehicle eliminates the need for investors to maintain several ties with many companies and simplifies communication. This may be essential, especially during periods of escalating instability.


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