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Flow of funds: Multi-strategy funds are losing their lustre

Some investors are due to reduce holdings in favour of single-strategy peers.

Multi-strategy hedge funds constitute the third-largest holding in investors’ portfolios, next to equity long/short and event-driven strategies. However, the strategy might be losing its shine. According to the Deutsche Bank 2006 Alternative Investment Survey released in January, investors are beginning to consider reducing exposure to multi-strategy funds. More than 1,000 investors in hedge funds responded to the survey from across the investment spectrum. Investors were asked how they would be rebalancing their portfolios in 2007 in order to estimate the movement of assets from one strategy to another. The predicted change in assets for multi-strategy funds was minus 6%.

John Dyment, global head of the hedge fund capital group at Deutsche Bank, believes these assets are being redeployed to single-strategy hedge funds. “Many investors, and particularly funds of hedge funds, have embraced multi-strategy hedge funds for their ability to reallocate assets, and actively manage portfolios on a real-time basis,” he says. “But now that multi-strategy funds are well represented in portfolios, some funds of hedge funds want to differentiate themselves from their peers, and one way is to find unique managers that trade single strategies and shift some assets to them.”

For endowments, pension funds and foundations looking for higher returns, single-strategy funds with their concentration can offer greater opportunity for higher performance.

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