|Multi-Manager Hedge Fund|
A multi-manager hedge fund is an offering consisting of multiple fund managers. The offering may comprise managers within the same asset class or managers specializing in different markets and instruments. There are two main types of multi-manager funds: (1) fund-of-funds and (2) manager-of-managers. Fund supermarkets can also be considered as multi-manager products.
A fund-of-funds usually is structured as a limited partnership with the investment manager being responsible for performing asset allocation, manager due diligence, and manager monitoring.
A fund-of-funds can be dedicated—focused on one style, such as relative value, eventdriven, or even multi-strategy that focuses on a diversified exposure to several hedge fund categories. Hedge Fund Research (HFR), a Chicago-based index provider, has recently created a new database that groups fund-of-hedge funds by risk profile: conservative, diversified, market-defensive, and strategic.
Investing in a fund-of-funds provide several benefits. They offer instant diversification by investing in a number of funds and reducing idiosyncratic risk contributed by the individual funds. Studies of fund-of-funds demonstrate that a portfolio of five hedge funds can eliminate approximately 80% of the idiosyncratic risk of individual hedge fund managers.
Fund-of-funds facilitate access to hedge funds and for minimum investment of $1 million, investors can get access to a diversified portfolio of hedge funds that themselves usually have a $1 million investment minimum. Several fund-of-funds are listed on an exchange (e.g., Dublin, Frankfurt, London, and Zurich) and are members of clearing systems.
The familiar trading and settlement processes through an exchange, as well as the greater perceived oversight and transparency, offer some investors increased comfort with this type of product.
Fund-of-funds offer “professional management and built-in asset allocation”, as well as access to closed hedge funds. Further, they are able to get better transparency by virtue of the size of assets they invest in underlying managers, as well as confidentiality agreements that give them timely access to underlying positions.
Some of the disadvantages of fund-of-funds are the additional layer of fees, and possibility of duplication or overdiversification. Fund-of-funds usually charge a management fee, in addition to the fee of underlying hedge funds, of 1–2% on assets, and a performance fee of 10–20%.
Furthermore, they may hold of setting positions or the same position in the underlying funds, diminishing the investment return to the investor. Fund-of-funds may offer more liquidity than the underlying funds and should have a liquidity buffer to meet redemptions.
A manager-of-managers assembles and sometimes seeds specialists, offering them a common trading and risk platform. The manager monitors the specialists’ performance, engages in risk management at the aggregate level, and allocates risk capital depending on market opportunities and performance. A manager also can change the team in response to investor demand and market conditions.
A fund supermarket is a platform that offers multiple choices that have been prescreened but are not actively managed as a single offering and some even bundle funds by style or risk profile. Finally, investors have the advantage of some due diligence as well as obtaining their exposure through one supplier and receiving consolidated performance statements.