Alternatives

Multistrategy hedge funds ruled roost in 2015

Institutions responsible for bulk of investment

Multistrategy hedge funds were the industry's darling in 2015, accounting for about 84% of net inflows across all strategies, supported by rising investment by institutional investors.

In fact, multistrategy hedge funds have been one of the hottest investment strategies since 2013, with assets rising 56.1% to $477.7 billion for the category as of Dec. 31, compared with $306.1 billion as of Dec. 31, 2013, data from eVestment LLC, Marietta, Ga., showed.

Hedge fund assets totaled $3.027 trillion as of Dec. 31, eVestment researchers estimated.

Much of the money moving into multistrategy hedge funds is from institutional investors that have pulled a total of more than $400 billion from long-only U.S. equity strategies and are moving the money into hedge funds and other alternative investments, said Peter Laurelli, vice president-research, based in eVestment's New York office.

Several asset owners made multistrategy hedge fund moves within the past year.

nThe $14.5 billion New Mexico Public Employees Retirement Association, Santa Fe, awarded $310 million to BlueMountain Capital Management LLC to manage in a multistrategy credit hedge fund separate account.

nWest Virginia Investment Management Board, Charleston, increased its investment in HBK Multistrategy Offshore Fund, managed by HBK Capital Management, by $20 million to $80 million from the state's $16.9 billion defined benefit plan.

nMyriad Asset Management Ltd. received investments in its multistrategy funds, including $50 million from the $25 billion Texas Municipal Retirement System, Houston, in Myriad Opportunities U.S. Fund, and $25 million in the Myriad Opportunities Master Fund by the $3.7 billion Kern County Employees' Retirement Association, Bakersfield, Calif.

Twofold appeal

The appeal of multistrategy hedge funds for institutional investors is twofold, sources said: performance and diversification.

About $130 billion, or 75.6%, of the increase in eVestment's multistrategy hedge fund category over the three-year period ended Dec. 31 was from net flows, Mr. Laurelli said.

The balance was from investment returns.

Although aggregate performance of eVestment's Broad Multistrategy index was down a slight 0.08% in the year ended Dec. 31, it outperformed 64.3% of eVestment's other primary hedge fund strategy indexes. The multistrategy category outperformed the -2.1% decline of eVestment's broadest index, the Hedge Fund Aggregate, by 202 basis points.

Mr. Laurelli said 51% of multistrategy hedge funds in his firm's database produced positive returns in 2015, with an average return of 8.2%, with the remainder returning an average -7.1%.

By contrast, the 8.1% average positive return of eVestment's entire hedge fund database was just 10 basis points under that of the multistrategy category, but the 9.1% average negative return of the full universe was 200 basis points lower.

“2015 was a challenging year for many single-strategy hedge funds, specifically fundamental deep-value-oriented strategies, as they got caught on the wrong side of strong trends resulting from macro concerns and monetary policies,” said Melanie Rijkenberg, associate director, based in the London office of Pacific Alternative Asset Management Co., a hedge funds-of-funds manager.

Multistrategy funds, on the other hand, performed well in aggregate because they tend to have more exposure to relative value strategies that performed better in 2015 by providing returns on the long and short side, said Ms. Rijkenberg. The traditional multistrategy model allows portfolio managers to anticipate and react to market trends by allocating dynamically to and away from strategies that are more or less attractive in a particular market regime, she added.

Multistrategy performance, while good in aggregate, tends to show significant divergence, sources said, based on the portfolio manager's expertise and timing in constructing the overall portfolio as well as on the quality of the internal hedge fund strategy teams he or she can tap.

Multistrategy returns

Among the range of 2015 returns of institutionally oriented multistrategy funds, collected by Pensions & Investments:

• Citadel LLC's now-closed Wellington LLC, 14.4%;

• Visium Asset Management LP's Visium Global Fund, 10.3%;

• Eton Park Fund, managed by Eton Park Capital Management LP, 7.5%;

• Carlson Capital LP's Double Black Diamond Fund, 0.7%;

• OZ Master Fund, managed by Och-Ziff Capital Management Group LLC, -0.3%.

When it comes to diversification, some asset owners, including first-time hedge funds investors and those upgrading their manager lineups, are looking at multistrategy hedge funds as a substitute for hedge funds of funds, said Ian Toner, managing director-manager search, at investment consultant Verus Advisory Inc., Seattle.

“That's not an unreasonable choice because multistrategy hedge funds offer a diversified investment approach, but you need to be careful and know what you're buying, who you're buying and what you're paying,” Mr. Toner said.

Diversification is an important aspect for institutional multistrategy investors because the funds tend to be part of the core holdings of a hedge fund portfolio, said John Jackson, a St. Louis-based Mercer Investments principal who focuses on hedge fund manager research and monitoring.

Client redemptions from multistrategy hedge funds tend to be lower than for single-strategy hedge funds, Mr. Jackson said, precisely because “the multistrategy proposition — done right — offers dynamic management between strategies combined with very strong risk management.”

Mr. Toner's buyer-beware admonition also is predicated on multistrategy managers being not only dynamic, but also “able to move money around quickly.”

Kern County

Kern County Employees' Retirement Association will further diversify the core multistrategy hedge funds in its $355 million hedge fund with the recent addition of Asia-focused Myriad Opportunities Master Fund, said Peter Tirp, chief investment officer. Funding for the $25 million allocation is pending.

One other multistrategy hedge fund, managed by Indus Capital Partners LLC, also focuses about 50% of its investments directly in Asian opportunities, while the other half of the portfolio contains investments in companies with a lot of exposure to Asia, Mr. Tirp said.

The county fund's three other multistrategy hedge funds, managed by The D.E. Shaw Group, York Capital Management Global Advisors LLC and HBK Capital Management, are more global in orientation.

In aggregate, KCERA's multistrategy hedge funds (with the pending Myriad allocation) total $180 million or 47% of the overall hedge fund portfolio, serving as the core holdings in the portfolio. Ten single-strategy hedge funds form a ring of satellite approaches, including global macro, activist and credit. With the Myriad investment, the hedge fund portfolio will reach its target allocation of 10% of plan assets.

KCERA's multistrategy hedge fund pool has done its job, providing solid performance for the portfolio for the most part, Mr. Tirp said. He added that he might increase the hedge fund portfolio — investment guidelines provide an investment range of between zero and 15% — but it's unlikely he'll add more multistrategy funds.

“There are fewer legitimate multistrategy funds available for more investment these days,” he added.

To Mr. Tirp's point, with popularity, especially among institutional investors with large mandates to put to work, comes tightened capacity and closure of a number of the largest, oldest and best-performing multistrategy hedge funds, sources said.

“Nimble, diversified multistrategy hedge funds did well in 2015,” said William Ferri, but getting into some of the most desirable funds might not be easy because “a lot of the best multistrats attracted a lot of money and are closed to new investors.”

Mr. Ferri is New York-based group managing director and head of hedge fund solutions, investment solutions and products, UBS Asset Management, which manages $34.5 billion in hedge funds-of-funds portfolios.

Millennium Management LLC and Elliott Management Corp. are among the other large hedge fund managers that have closed or restricted access to their flagship multistrategy funds to new investors, according to sources.

Spokesmen for Citadel and Elliott declined to comment; Millennium's spokesman did not respond to requests for comment.

This article originally appeared in the January 25, 2016 print issue as, "Multistrategy funds ruled roost in 2015".