Hedge fund strategy: Top-down or bottom-up? What should FOHFs be doing?

Commerzbank recently relaunched its multi-strategy fund of hedge funds, where it will be applying a top-down asset allocation strategy within its manager selection process. “The range of hedge fund strategies is now so vast, and many of those are highly dependent on the economic environment,” says Mehraj Mattoo, global head of alternative investment strategies at Commerzbank Corporates and Markets in London. “Particularly so for those where the exposure is directional, such as CTAs or where the hedge fund activity depends on the stage of the economic cycle, such as global macro funds or merger arb funds. Some of the problems the hedge fund industry encountered in May and June of 2006 were where managers and funds of hedge funds partly got the underlying economic assumptions wrong. It is therefore important to have a top-down element in selecting managers. I think most funds of hedge funds would claim to have a...