Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Unique Opportunities and Risks Associated with Multistrategy Funds

Multistrategy funds seek to operate across a wide range of strategies and allocate their capital both structurally and opportunistically to each broad category of investment. The CIO and risk management professionals work together to ensure the firm is maximizing its capital, investing in new opportunities, and taking risk while at the same time staying within its risk, diversification, and potential drawdown parameters. Each firm employs a different model or set of rules for allocating capital, managing risk, and returns. In fact, one of the most important differentiating factors among multistrategy firms is the process they follow to manage risk and allocate capital. No two firms are the same.

Multistrategy firms expose investors to a variety of risks at any point in time. Investors are generally unable to predict or forecast their exact exposure to any one set of trades or strategies and must rely on the judgment of the firm's CIO to position the portfolio correctly for any set of market conditions.

The risks that an investor may be exposed to include almost all of the normal investment-related risks in individual hedge fund strategies. A few of the additional or unique risks inherent in most multistrategy funds are discussed next.

A multistrategy fund may not deliver the level of diversification that many investors in hedge funds are actively trying to obtain relative to their traditional stock and bond portfolios ...