Hedge funds have been struggling to post positive numbers since volatility returned this summer. Broad declines across all strategies sent investors running for the exits until October, when performance rebounded slightly. The HFRI Fund Weighted Composite index, published by Chicago-based Hedge Fund Research, rose 1.67 percent that month, for a year-to-date loss of 0.11 percent.
Multistrategy hedge funds, however, have held investor interest consistently, even during the downturns. According to new asset flow data from eVestment, an Atlanta-based research firm, allocations to multistrategy funds account for 70 percent of all global industry assets gained so far this year.
“Our surveys of institutional investors over the past two years have shown a continued interest in allocating to hedge funds, despite periodic dips in performance,” says Peter Laurelli, New York–based head of research at eVestment. “When you look at where that money is going, it is going to multistrategy funds.”
In October multistrats took in $2.4 billion in assets, recovering from negative inflows a month earlier. Year-to-date through October they brought in $52.4 billion, dwarfing all other strategies and exceeding 2014’s haul of $44.4 billion.
Laurelli says that as a group, multistrategy funds have only seen four months of investor redemptions since the beginning of 2013; that number is lower than for any other major hedge fund cohort. Interest in these funds makes them a bellwether of long-term institutional appetite in alternatives, he adds.
Multistrategy funds are an easy way to achieve diversification without having to do a lot of research into managers and funds. This flexibility has made them popular with investors since before the financial crisis, but they aren’t bulletproof.
Following a rough second quarter, Och-Ziff Capital Management Group, a $44.6 billion alternative asset manager and one of the bigger multistrat players, saw its flagship multistrategy OZ Master Fund decline to $29.5 billion in assets at the end of the third quarter, compared with $33.8 billion at the end of the third quarter last year, according to the New York–based firm’s latest earnings filing. Despite gaining 1.83 percent and 0.29 percent, respectively, in October and November, the OZ Master Fund is barely positive year-to-date, at 0.02 percent.
On an October earnings call, Daniel Och, chairman and CEO of Och-Ziff, said that volatility led to a dip in performance, but he remained upbeat: “Our multistrategy, credit and real estate funds are important sources of our future asset and earnings growth.”
According to Laurelli, big, heavily diversified multistrats like Och-Ziff’s flagship fund are driving the bulk of investor interest in the space. These funds saw the biggest rebound in asset flows, even with wobbly performance. But they require multimillion-dollar investments, so multistrategy funds may work best for investors with a strong preference for alternatives.
Cédric Kohler, head of advisory services at Fundana, a $1.3 billion asset manager based in Geneva that specializes in alternatives, suggests that for investors who only want to put a small percentage of their portfolio into hedge fund strategies, multistrats may not be the best option. “It really depends on how savvy the investor is,” Kohler notes. “We have run into difficulty with each trustee understanding each sleeve of a broad multistrategy fund. We also run into questions of liquidity with some of the strategies involved.”
For smaller, more conservative institutions, Kohler says that going into a single strategy may be a better place to start. Once those investors grow their alternatives allocation, they can add multistrategy funds to bring diversity to investment themes or provide certain exposures without having to craft a whole hedge fund portfolio from the ground up.
Take equity long-short. “There’s a real argument for having a fund of hedge funds on that strategy,” Kohler contends. “You can find a broad set of expertise, such as sectorial or opportunistic managers, or local or global exposure.”
Arvin Soh, a New York–based portfolio manager with Swiss alternative-asset specialist GAM, agrees. Even though allocating to a multistrat seems efficient, it’s still important to take note of the managers who make up the fund and ensure that they can stand on their own, contends Soh, a member of the Sf124.2 billion ($121.9 billion) firm’s alternative-investments solutions team. “You have to look at what each manager is doing,” he says. “During the recent big move in the Swiss franc, for example, we saw some multistrats take losses in currencies, but if you go deeper, you can see that those losses weren’t even. Some managers handled that move better than others.”
As the market grows more volatile, manager choice will be even more important. Volatility could benefit some of the hedge fund strategies that have been lagging recently, according to Frederick (Rick) Lake, co-founder and co-chairman of Stamford, Connecticut–based Lake Partners and portfolio manager of its $200 million multistrategy Lake LASSO Alternatives Fund.
“Volatility is generally supportive to some hedge fund strategies and can help with the short side of the book as well,” says Lake, whose firm, which had about $3.4 billion in consulting assets and $313 million in assets under management as of September, is a subadviser to Chicago-based Aston Asset Management. “Multistrategy investors could see parts of their portfolios start to pick up in the next few months.”
During the last big episode of volatility, the 2011 European sovereign debt crisis, asset flows tracked by eVestment show that multistrats saw some redemptions but also recovered quickly, owing to the diversity of strategies within a single vehicle.
Apart from some seasonal redemption pressures like the summer sell-off, it’s hard to see investor interest in the group fading, precisely because of this dynamic, eVestment’s Laurelli reckons. “Our data tell us,” he says, “that institutional investors are going to continue to allocate to hedge funds, and the trends suggest that multistrats will be the beneficiaries of that.”
