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

Chapter 8

Multistrategy Funds and Funds of Hedge Funds

The hedge fund style that looks to exploit opportunities across all categories of hedge fund investing is referred to as a multistrategy fund. In addition to multistrategy funds, investors also use funds of hedge funds (FoF) and hedge fund replication products to obtain exposure to a wide range of hedge fund strategies. Although the headline investment objectives of all three funds are somewhat similar, the flexibility, liquidity, fee structure, risk management, and organizational models employed by each type of firm and product are very different.

A multistrategy fund is a hedge fund run by a single firm or advisor that allocates capital to a wide range of traders and portfolios. It allocates capital to each strategy based on diversification, volatility, and returns objectives and is not tied to just one style of trading. The fees charged by a multistrategy fund are similar to any other hedge fund and include a fixed 1 to 2 percent management fee and a variable 10 to 20 percent performance fee. Multistrategy funds offer a number of benefits to investors. They can allocate capital more quickly between a wider menu of strategies than investors operating on their own. Each strategy within the firm can benefit from the market intelligence and information available from other strategies. Each manager can leverage the infrastructure and cost base of the firm to operate at a higher scale or lower cost than it could achieve on its ...