Multi-Strategy Hedge Funds: Equity in a Different Shade?

Investigating the allocation skills of hedge fund managers

March 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Investors can outsource the hedge fund selection process to multi-strategy hedge funds
  • These have outperformed broad hedge fund indices since 2005
  • However, most of the returns can be attributed to simple equity exposure


Investing in hedge funds is challenging as both strategies and fund structures are complex. Almost all strategies are cyclical, although not all are on the same cycle. For example, statistical arbitrage tends to perform best when volatility is high, however, that represents a poor environment for long-short equity strategies with a value bias. The performance drivers are relatively clear for some strategies, but far less obvious for others like CTAs.

Creating and managing a dedicated team of hedge fund analysts is expensive and time-consuming, which makes it viable for only the largest asset managers. An alternative option is hiring investment consultants, however, there is plenty of evidence that these do not add much value to the strategy selection process. The key issue seems to be that these primarily recommend the largest and most successful funds in order to minimize their own career risk, which essentially represents performance chasing (Jenkinson et al). Given a lack of performance consistency, this approach tends to result in poor returns.

Asset allocators can also outsource the strategy selection process to hedge fund managers by investing in multi-strategy hedge funds. Theoretically, these should have fewer conflicts of interest and superior knowledge of the different hedge fund strategies as well as their performance drivers (read Hedge Fund Factor Exposure & Alternatives).

In this short research note, we will explore the performance and characteristics of multi-strategy hedge funds.


The assets under management in the hedge fund industry have increased by approximately 10% per annum from $1.4 to $3.4 trillion in the period between 2011 and 2020. Multi-strategy hedge funds also gained assets over that period, but their market share decreased from 13% to 10%.