Multi-strategy hedge fund assets surpass $400 billion

Investors flock back to strategy after years of trickling inflows

Stock market performance

Assets under management (AUM) of multi-strategy hedge funds have reached a new peak of more than $403 billion in the third quarter of 2014, according to analysis of hedge funds in the eVestment research database.

evestment1-hfr1214The sector attracted more investor capital over the past two years from Q4 2012 to Q3 2014 than even relative value credit hedge funds, whose AUM has soared since the start of 2010, as shown in figure 2.

evestment2-hfr1214There are 671 multi-strategy funds in eVestment’s research database, making the strategy among the hedge fund industry’s most prevalent in terms of overall number of funds and level of assets managed.

Investors added an estimated $36.2 billion into multi-strategy hedge funds from Q1 to Q3 of this year, as sector AUM during the year surpassed its prior all-time peak set in Q4 2007.

The rise in net inflows marks a turnaround for multi-strategy hedge funds, which had experienced less than $25 billion of net inflows from the start of 2010 to the second quarter of 2013.

Research company eVestment says: “The prevailing industry trends continue to be very much in favour of multi-strategy hedge funds, particularly large globally focused strategies.

“This fits the notion that institutional investors have been turning to the multi-strategy segment for diversification as they continue to invest directly in the industry and desire institutional quality operations that meet the scope of potential investments.”

The story is different for multi-strategy hedge funds with assets less than $1 billion, which had aggregate net outflows in the first three quarters of this year.

evestment3-hfr1214Curiously, while investors offered a vote of confidence to the strategy, multi-strategy hedge funds have underperformed the aggregate hedge fund index over the past two years, as shown in figure 3.

Over the last 60 months, cumulative returns of the average hedge fund were 30.18%, while multi-strategy hedge funds returned 27% and multi-strategy funds of hedge funds returned 18.16%.

Another industry trend spotted by eVestment is the shift of new multi-strategy funds from the US to overseas jurisdictions. The proportion of new multi-strategy funds from the US has fallen from a pre-2005 high of 59% to just under 48% in 2011, a level at which it has remained since.


Fund of hedge funds trends

Commingled funds of hedge funds (FoHFs) continue to invest in fewer and bigger hedge funds, possibly as a response to the growing clout of institutional investors, according to eVestment research.

evestment5-hfr1214From the start of 2012 to Q3 2014, commingled FoHFs appear have become more concentrated, as the number of underlying funds that the average FoHF invests in has declined, as shown in figure 6.

evestment6-hfr1214At the same time, the typical commingled FoHF’s largest manager allocation accounts for a greater percentage of its portfolio.

Underlying funds tend to be bigger in terms of assets under management, as shown by figure 7. While the picture varies over time as more and more funds backfill eVestment’s data, a clear trend is discernable.

evestment7-hfr1214eVestment does not give a reason for the trend for FoHFs to invest in fewer, larger funds, but says: “Whatever is the precise reason these trends are occurring it is of interest that they are occurring at a time when investor interest has slowly shifted back in favor of commingled FoHFs.”

The research company reckons that this year may be the since 2010 that investor inflows into commingled FoHFs outpace redemptions.

Prior to 2014, commingled FoHFs investor flows were persistently negative, but the weight of redemptions that hung over the industry dating back to Q3 2011 appeared to lift in 2014.

Flows were positive in Q1 this year, positive again in Q2 and flows in Q3, while negative, were small.


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