Hedge funds: Breadth leads to destruction?
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Hedge funds: Breadth leads to destruction?

That a third of hedge fund assets are invested in multi-strategy funds has implications for the wider market when funds need to sell off their most liquid assets.

Does anyone remember when single-strategy hedge funds started branching into other strategies with a passion three years ago? The big debate back then was style drift, and whether these managers had the experience to invest in asset classes beyond their existing expertise.

After a brief period of humming and hawing, investors decided it was better for a fund to have broader investment opportunities, and the hedge fund managers’ performance in multi-strategy funds eased any concerns about their expertise.

What no one considered at that time, however, were the implications that enormous funds investing across a range of asset classes would have for the broader financial markets, and portfolio risk levels.

According to research from Lipper, multi-strategy funds account for almost one-third of hedge fund industry assets – about $600 billion. And most of that money is invested with a relatively small number of multi-strategy players.

Being multi-strategy makes sense, and is simply an evolution of the hedge fund industry. However, the structure of multi-strategy funds has already had an impact on financial markets at large. The funds tend to use leverage across the whole firm, with the assets of each strategy used to back the borrowing. It is now presumed that the downward spiral of stock markets in August was caused by the sell-off of equities by a large multi-strategy fund that was worried about its credit positions and needed to ditch liquid assets to post more collateral.


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