Single-strategy funds contrast with multi-strategy FoFs, which usually rebalance the assets allocated to a certain strategy according to changes in market conditions and investment views.
Single-strategy fund of funds have less flexibility as they are concentrated on one strategy only. When a certain strategy is not performing well, single-strategy funds have little ability to move out, being at a disadvantage.
Given that hedge funds’ objective is to generate alpha, the ability to avoid certain strategies is a valuable alternative to FoFs, an alternative that single strategy FoFs do not possess. Both single-strategy and multistrategy FoF suffer from high management fees and incremental costs.
Single-strategy funds aim to find the best hedge fund managers and to minimize single-manager risk. Diversification is limited by the fact that hedge funds require minimum investment amounts that may be significant when compared to the size of the FoFs net asset value.
Typical hedge fund strategies are: convertible arbitrage, distressed securities, emerging markets, equity long biased and equity long only, equity long/short, equity short, market timing, event-driven, macro, sector funds, equity market neutral, merger arbitrage, statistical arbitrage, and fixed income strategies.
Davies et al argue that the apparent underdiversification of single strategy FoFs does not take into account improvements in the higher moments of the portfolio distribution and that skewness and kurtosis are most important in portfolio diversification.
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| Single-Strategy Funds of Funds |
