These multistrategy products stem from domestic tactical asset allocation strategies, 1980s-era strategies that make tactical bets on U.S. equities, bonds and cash. Global versions of these strategies became somewhat successful in the 1990s, but the booming stock market limited the appeal, because they frequently sell stocks as share prices rise.
But hedge fund-of-funds — essentially a different type of multiple alpha strategy — have "warmed (investors) up to the concept," said Max Darnell, partner and chief investment officer at First Quadrant, Pasadena, Calif.
"The other thing that's happened here is an increased appreciation for the importance of breadth (making multiple types of bets) in constructing portfolios. Strategies that target single market inefficiencies or a small number of market inefficiencies are simply doomed to underperform those strategies that have access to a wider array of market inefficiencies," Mr. Darnell said.
These strategies have taken on an ever-more exotic bent. In the 1990s, First Quadrant added currency bets and, later, volatility arbitrage. The firm now manages about $10 billion in multistrategy products, more than half of which were won in the first half of 2005. Similarly, Mellon Capital, San Francisco, manages $9.7 billion in absolute-return strategies and recently launched Global Alpha II, an absolute-return strategy that actively manages exposures to global stock, bond and currency markets.
Another success story is Newport Beach, Calif.-based PIMCO's All Asset Fund, for which asset allocation decisions are made by Research Affiliates LLC, Pasadena, Calif., and investments are made in underlying PIMCO funds that invest in both traditional asset classes and alternatives. The fund, launched July 1, 2002, has doubled its assets under management since December, hitting "north of $8 billion," said Robert D. Arnott, chairman.
The latest trend is offering strategies that package bets on both market exposure and securities selection.
Clients are asking executives at Goldman Sachs Asset Management, New York, to "give me your best alpha sources plus your most diversified beta sources" and figure out how much to allocate to alpha and beta, said Mark Carhart, managing director and co-chief investment officer of GSAM's quantitative strategies group.
"The strategy looks a lot different than a traditional asset allocation. There are a relatively small amounts of equities and a large amount of absolute-return strategies, and an atypical amount of exotic betas," such as commodities or emerging market debt or equity, Mr. Carhart said.
William Mahoney, director, business development, at Bridgewater, said some clients are asking the firm to overlay its pure alpha strategy on top of its "all-weather" strategy, which makes market exposure bets only. Within the last two years, 15 clients have allocated a total of $5 billion to the combined strategies.
"That's very attractive, because ‘all weather' has a different beta exposure" than typical asset mixes, Russell's Mr. Nordquist said.
UBS' dynamic alpha more closely resembles a traditional global balanced portfolio, but also makes bets on both alpha and beta. "We take market risk when we feel that market risk is appropriately compensated, and we take active risk, or alpha, when we feel that that risk is adequately compensated within the portfolio," UBS' Mr. Singer said.
UBS runs $3.6 billion globally in the strategy, of which $2.2 billion is for institutional or high-net-worth clients. The Clark Foundation is the firm's only U.S. institutional client, but it has also raised more than $800 million from a U.S. mutual fund version launched in late January.