Why Consider Multi-Manager Hedge Fund Portfolios

Many so-called alternative investment advisors “demonize” multi-manager/multi-strategy hedge fund portfolios or so-called all-weather strategies, arguing that the diversification effect fails precisely when it is most needed, i.e. during periods of high market turbulence and volatility.
 
However, intelligently diversified multi-manager/multi-strategy hedge fund portfolios offer a smoother performance by leveraging a broad range of strategies and managers. This approach mitigates the risk of significant losses during market downturns while maintaining growth potential in bull or sideways markets. Unlike long volatility strategies, which can incur high "insurance costs" and losses over time, these portfolios provide a more balanced investment approach. By optimizing diversification, investors can achieve more consistent results, ensuring stability across various market conditions.
 
Here is why:
 

• Investing across different asset classes, fund managers and investment strategies provides a more stable long-term investment return.
• Optimal diversification leads to risk reduction and the opportunity to enhance potential returns per unit of risk adopted.
• A multi-manager approach also gives an investor access to a broad range of asset manager expertise and specialist portfolio manager skills that is most capable of meeting the investment objectives.
• With a multi-manager approach, the investor should benefit from a more stable return stream and lower volatility in returns compared with the direct investment route. Lower volatility is the result of uncorrelated or lower-correlated constituents.
• Market cycles make it almost impossible for any single manager to consistently time the market and outperform any single asset class or sector; therefore, a multi-manager approach continues to be one of the most consistently successful ways to provide superior volatility-adjusted performance.

 
Achieving sustainable success necessitates identifying and selecting managers who exhibit low correlation with one another and possess the capability to generate alpha. Essential to this process is professional portfolio construction, which involves repeated sensitivity and scenario analyses, as well as stress tests. Intelligent capital allocation across strategies and managers not only helps manage and control losses but also delivers attractive positive absolute returns.