Consultant Alan Dorsey, director of alternatives at CRA RogersCasey, Darien, Conn., said his institutional clients are including multistrategy hedge funds alongside non-directional hedge funds of funds as core investments. Multistrategy hedge funds add a strong measure of diversification to a hedge fund portfolio because returns are much less correlated to each other than the returns of hedge funds-of-funds managers, which tend to be more correlated, Mr. Dorsey said.
In addition to lower fees and non-correlated returns, Mr. Dorsey said, "With multistrategy hedge funds, the investor gets a more intimate view into the investment world and the specific trades made by the fund across a range of strategies, to the extent the manager opens up," noting this degree of transparency is not typically available for all hedge funds used by hedge funds of funds.
The lure of significant institutional money moving into multistrategy hedge funds persuaded Citigroup Inc. to create Tribeca Global Investments LLC within its Citigroup Alternatives Investments unit June 2004. Tribeca was established specifically to manage a multistrategy hedge fund that could handle upward of $20 billion.
Tanya Styblo Beder, Tribeca's chief executive officer, noted that while funds of funds were a "perfect solution at the beginning" for institutional investors, they are rapidly losing their appeal because they simply can't move capital into and out of hedge funds fast enough in response to market conditions.
"Hedge funds of funds may get their information very late. There might be trouble moving money around efficiently," she said. "We could see all 18 of our strategies at once at the time of the London bombings (summer 2005), we could react. Returns are tougher in a hedge fund of funds in an era where dissemination of information is so much faster than ever before."
The hedge fund industry is at a significant shifting point, she added. "Hedge funds just can't get there from here. They can't get from $1 trillion to $5 trillion without building more capacity, and you can't build capacity without multistrategy capability. It's not a question of if; it's when."
Ms. Styblo Beder built an infrastructure for Tribeca that offers "industrial-grade institutional capability." The firm now has three offices (in New York, London and Singapore), 150 employees that manage 22 live portfolio strategies and a management group of 10 senior executives. It has about $1.65 billion under management.