In the investment industry, those that understand risk understand the benefits in reducing a portfolio’s exposure to any singular asset or idea. The Investment objective of multi-strategy funds is to deliver consistently positive returns regardless of the directional movement in equity, interest rates or currency markets.
Evidence of the return and diversification benefits of multiple strategy hedge funds can be found during the lost decade of equity returns from 2000 to 2010. While major global indices such as the S&P500 lost more than -14% during the volatile period, multiple strategy hedge funds increased returns by more than +150%. Even during the most volatile periods of 2000 – 2002 and 2007 – 2008, multiple strategy hedge funds suffered fewer, less dramatic, draw-downs, and in many instances made money during these periods as shown below:
A common theme in multi-strategy funds is that of long/short exposure in different asset classes. In general this creates a risk profile that is significantly lower than simple long-only equity market risk. The diversification benefits of multiple strategies, along with lowering correlation by utilizing different directional strategies, helps to smooth returns and reduce volatility. This is shown by the Dow Jones Long/short index:
Clearly, for those who recognize that risk is multi-dimensional, one can see that having multiple strategies, as well as limited downside exposure (by being short as well as long) can benefit by the combination of the two strategies together.
The key is the unique implementation of combining multiple strategies in a way that is non-competing and fits a complete risk package that allows an investor to maximize potential for gains whilst minimizing systematic shock.