Diversification and Risk-Adjusted Returns: the Appeal of Multi-Strategy Hedge Funds – May 2015

by Joseph McGee

  • 29 May 2015
  • HF

Investors interviewed at the end of last year for the 2015 Preqin Global Hedge Fund Report revealed their plans regarding various hedge fund strategies over the course of 2015. Out of these investors, 35% reported that they were planning to increase their exposure to multi-strategy hedge funds, with a further 57% stating their intention to maintain their exposure to the strategy. For some fund managers, such plans have materialized directly into asset growth. New York-based Millennium Management, for example, increased its assets under management from $22.4bn at the beginning of May 2014 to $29.2bn by the same time this year. Fund managers have increased their multi-strategy offerings to meet the higher investor demand, with 67 new multi-strategy hedge funds launched in 2014, representing 8% of all launches for that year and the highest proportion since 2010. Using data taken from Preqin’s Hedge Fund Analyst database, this blog will look at the factors that are driving interest in the multi-strategy approach and the prospect of continued growth through the rest of 2015.

Recent strong risk-adjusted performance is one of the main reasons attributed to the growing investor interest in the strategy. The Preqin Multi-Strategy Hedge Fund benchmark has seen gains of 9.43% over the last 12 months (as of April 2015), posting only two down months during this period. Furthermore, performance generated by multi-strategy funds has demonstrated lower volatility over the longer term, showing the real diversification benefits of the strategy and consistent returns delivered to investors; the Preqin Multi-Strategy Hedge Fund benchmark has seen volatility over the past three years (as of April 2015) at 2.71% compared to 3.61% posted by the Preqin All-Strategies Hedge Fund benchmark for the same period. Similarly, the Preqin Multi-Strategy Hedge Fund benchmark has produced a Sharpe ratio of 2.2 over the last three years, compared to 1.8 for all hedge funds.

Multi-strategy hedge funds appeal to investors because they offer the ability to gain exposure across a range of strategies within a single-manager vehicle. For investors unable to maintain a large diversified portfolio of hedge funds, multi-strategy funds are a viable alternative to the extra layers of fees imposed by fund of hedge funds managers. The chart above shows the top 10 strategies most prominently used by multi-strategy hedge funds, with the largest proportion (65%) of multi-strategy funds employing a long/short equity component. More interestingly however, the chart indicates that there is genuine diversification within multi-strategy funds, as the top 10 strategies pursued are divided across all top-level strategy categories: equity, credit, event driven, relative value and macro.

Multi-strategy hedge funds have piqued the attention of institutional investors through proven risk-adjusted returns delivered to investors and the diversification benefits unique to their multi-strategy approach. Appetite for the strategy can be seen through the increased proportion of multi-strategy launches fund managers have offered to meet demand. In view of these advantages and their strong performance so far this year, it seems likely that we will continue to see investor appetite for multi-strategy funds throughout 2015.

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