Multi-strategy hedge funds capture investors’ imagination
Dan Kemp, Morningstar
Investors are attracted by the possibility of getting both diversification benefits and positive returns through multi-strategy hedge funds
Of the many hedge fund strategies now available, few appear to have captured the imagination of investors, with the result that capital flows have been focused in a small number of categories.
Chief among these is the multi-strategy category, containing funds that operate either a broad range of strategies, or more often, invest a variety of asset classes using hedge fund techniques. There are several reasons for this popularity but perhaps the most important stems from the challenge of creating a diversified sub-portfolio of high quality hedge funds in a retail environment. It is far easier for investors to allocate capital to a single fund in the hope that this holding will deliver both diversification benefits and a positive return.
Largest hedge funds
The Genesis Emerging Mkts Invt Com B
Babson Capital European Loan A EUR Acc
Baring Dyn Asset Alloc I GBP
Mercer Liquid Alter Strat I-1 € Hedged
Nevsky Fund plc EUR
Total Return Divers Credit H GBP
Muzinich Credithedge Master Fund
Clareant European Loan Fund
BNPP Flexi III Deposit EUR P Acc
Global Multi-Asset Credit Fund H - GBP
The Baring Dynamic Asset Allocation fund is an example of a fund that is primarily multi-asset rather than multi-strategy but is nevertheless seeking to deliver a positive absolute return. While it has done a good job of meeting its objectives, it has not been immune from market volatility, providing investors with an important reminder of how difficult it is to achieve positive returns in falling markets and the importance of fully understanding the performance drivers of individual funds in this category.
A second strategy that has gathered significant support is long/short debt. Given European investors’ preference for fixed income assets, it is understandable that bond-based strategies have received support. However, an additional factor in their popularity is a growing concern that the multi-decade ‘bull’ market in bonds is drawing to a close as valuations become increasingly stretched. In this environment, people are naturally turning to fixed income strategies that could deliver positive returns in ‘bear’ market conditions.
These features reflect the structure of the Muzinich Credithedge Fund, one of the larger funds in the category. This fund has limited exposure to interest rate movements but instead adopts a multi-strategy approach to credit that is designed to deliver positive returns in a variety of market conditions.
Dan Kemp, Chief Investment Officer, EMEA, Morningstar
