Multi-strategy managers are receiving increasing attention from sophisticated pension funds that want high returns without the extra layer of fees charged by funds of funds. This complex asset class isn't for everyone, however. Multi-strategy hedge fund managers switch tactically between various strategies to take advantage of opportunities, but this can make their exposures difficult to track and can hinder transparency. Some multi-strategy have a narrower focus, for instance credit multi-strategy or event-driven.
The latest funds eyeing the strategy are the City of Philadelphia Board of Pensions and Retirement, the San Bernardino County (Calif.) Employees Retirement Association and Kroger Co.'s defined benefit plan. Jeff Applebaum, director of client services at Deephaven Capital Management, a $3 billion multi-strategy manager, said the assets his firm manages from defined benefit plans have doubled in the last year to 20% of the firm's overall assets.
"I believe the interest in multi-strategy managers will continue to grow, and will be, as well as should be, embraced by courageous boards and cios that embrace innovation," said David Kabiller, founding principal at AQR Capital Management, a multi-strategy manager. "Multi-strategy managers have the benefit of having full risk transparency and liquidity to make tactical allocations, whereas funds of funds do not."
Multi-strategy funds have delivered 10-15% returns over the last two years, according to Lee Diamandakis, director of hedge fund research at Clark Strategic Advisors. Meanwhile, funds of funds have been lucky just to reach 10%. "Funds of funds are more predictable, but there is also the concern of double fees," he added. Generally, multi-strategy managers have a 1.5-2% management fee coupled with a 10-20% incentive fee. Funds of funds typically have a higher minimum investment than multi-strategy funds, but the minimums for both are usually $1-5 million. "I wouldn't say this is enforced because they obviously want the assets," he observed.
Ken Phillips, founder of RCG Capital Partners, said multi-strategy managers are less transparent. "It's a slippery slope because if your money is moving around globally, from strategy to strategy, you don't know what the manager is doing, and he could be putting your asset allocations and risk/budget way out of whack," he said. He thinks the argument that funds of funds have double fees is absurd. "It's not another layer, it's my job," he said. "The fund of funds fee is essentially nothing more than a consulting fee for alternative investments." Jeb Doggett, a partner at Casey, Quirk & Associates, said with funds of funds investors get access to best of breed funds and manager diversification.
Diamandakis said comparing managers is like comparing apples and oranges. Cyrus Capital Partners, for instance, is more of a relative-value manager in that it relies on putting arbitrage on a security, and gets good returns when there is a lot of volatility. Stark Investments, he argues, is truly a multi-strategy manager in that it is very well-diversified because its strategies include, among others, convertible arbitrage, event-driven and also relative-value.