Hedge Funds Multi Strategy
- Multi-strategy hedge funds are the most diverse portfolios in the hedge fund universe.
- Multi-strategies combine different single hedge fund strategies in one portfolio and differentiate considerably from each other. Most often, such portfolios include a variety of long-short, relative value and event-driven strategies.
- Many Fund-of-Hedge Funds (FoHF) select and combine a variety of single hedge fund managers to form multi-strategy portfolios with varying risk-/return goals.
- On average, multi-strategy hedge funds offer substantial diversification benefits for traditional long-only portfolios and increase the portfolio efficiency meaningfully in terms of risk-/return.
Multi-strategy hedge funds are the most diverse portfolios among the hedge fund universe. Multi-strategies combine different single hedge fund strategies in one portfolio and differentiate considerably from each other. Most often, such portfolios include a variety of long-short, relative value and event-driven strategies. There are also many Fund-of-Hedge Funds (FoHF), which select and combine a variety of single hedge fund managers to form multi-strategy portfolios with varying risk-/return goals.
Limited drawdown risk
Within the hedge fund world, there exists an immense variety of strategies. Therefore, they can be very different from each other regarding their investment focus, risks, volatility and expected return profile. At Alpinum Investment Management, we build multi-manager portfolios with the primary goal to benefit from non-traditional return sources and to form portfolios with low correlation to broader market indices. Such multi-strategy portfolios typically aim to match or exceed the return expectations of classic bond investments while showing limited correlation to traditional markets such as equities. A further crucial element of success is to control the drawdown risk. The limited drawdown risk of a portfolio provides a meaningful contribution to the efficiency of any investment portfolio and is a critical element to generate more stable returns.
Emerged from relative value strategies
Many of the first more significant multi-strategy hedge funds had emerged from relative value strategies such as “convertible arbitrage”. Over time, when many more market participants tapped the very same market, it had resulted in lower arbitrage potential, and market liquidity also became a challenge with many fast-growing hedge funds becoming multi-billion setups. Consequently, these funds started to expand their investment universe into new territories and became “multi-strategy” funds. Hence, from a historical perspective, many multi-strategy hedge funds tended to have a meaningful allocation to credit-related relative value and fixed-income arbitrage strategies. However, over the last years, quantitatively and model-based strategies (most often in the format of equity long-short strategies) have meaningfully grown in size and became a significant part of the investment universe nowadays.
Our investment universe includes all hedge fund strategies when building up a multi-strategy portfolio based on single hedge fund managers. Our focus is always set where the most relative value opportunities can be identified. The allocation is actively managed and adjusted to the prevailing market environment.
The equity long-short strategy is the most popular hedge fund strategy attracting the most capital among the hedge fund universe. A successful long-short strategy helps to increase the efficiency of a traditional long-only investment strategy by taking advantage of profit opportunities from securities identified as under- and over-valued.
Conceptually, the strategy has the goal to invest simultaneously in stocks on the long side (buying undervalued stocks) and on the short side (selling overvalued stocks). If a long-short strategy uses the same position size for longs and shorts, the investment strategy has no directional market exposure. Hence, the investment return is the pure result of stock selection.