Multi-strategy hedge funds could face challenges

Leonard Dorsaz, Analyst Fund Manager, overseeing the Piguet Opportunity fund, examines the evolution of hedge funds and the growing significance of single-manager funds in portfolio construction.

This article was featured in Citywire on February 9, 2024.

In the hedge fund landscape, multi-strategy funds such as Millennium and Citadel have played a leading role. These funds adopt a diversified approach by investing in various strategies across different asset classes through numerous independent teams, each managing a specific mandate.

Their goal is for each team to generate a low but very stable performance and to use significant leverage so that the final result is attractive to their clients. To achieve this, they follow an extremely rigorous risk management approach: a team can be dismissed following a dip of just a few percentage points.

In recent years, multi-strategy funds have not only shown resilience, but they have also stood out in terms of performance and capital raising. Their success can be explained by a combination of strategic flexibility, the expertise of seasoned portfolio managers, and their risk management.

The ability of these funds to capture alpha has attracted substantial investments, thus consolidating their position as major players in the alternative funds industry.

However, the exceptional performance of multi-strategy funds could face challenges in the coming years. As these funds reach a considerable size, risk management becomes increasingly complex.

Their strict framework, although essential for capital preservation, may limit the potential for returns. And it is probably unrealistic to think that the hundredth team hired has the ability to generate alpha as attractive as the previous ones.

These limitations were manifested in the performance of these funds last year, where their significant size and risk mitigation strategies led to more moderate performances compared to previous years.

In the midst of this landscape, the resurgence of funds managed by a single manager last year is particularly important. While multi-strategy funds offer diversification, funds managed by a single manager provide investors with a more focused approach. The appeal lies in the potential for attractive alpha generation and in investors’ ability to choose specific areas of exposure.

Moreover, funds managed by a single manager offer a level of transparency that may be more difficult to achieve in larger, much more complex multi-strategy structures.

In building a balanced portfolio, it becomes crucial not to overlook the role of these specialised funds. Their ability to focus on specific strategies, markets, or asset classes allows investors to adjust their exposure according to their preferences and risk appetite. This selectivity not only enhances the potential for alpha generation but also provides a more transparent and understandable investment proposition.

In conclusion, while multi-strategy funds have undoubtedly been successful in recent years, their significant growth could hamper their future performance. Recognising the importance of funds managed by a single manager in portfolio construction allows investors to leverage the benefits of a more focused and transparent approach, unlocking new perspectives for alpha generation in the ever-changing world of hedge funds.