Investing Across Many Funds

The last strategy that we will talk about is investing across multiple strategies.  There are two methods:  through a third party called a fund of funds or within a multi-strategy hedge fund.  Both are similar investments that create market forecasts.  They are used to allocate capital to the funds and strategies that will outperform.  If there is a lot of merger and acquisition activity, they may invest in a merger arbitrage fund.

For the fund of fund strategy, the advantages are:

• Diversification among hedge fund strategies
• Ability to invest in different hedge fund managers
• Another layer of monitoring and due diligence

The disadvantage is that the fund of fund manager charges an additional layer of fees.  This is known in the hedge fund world as the "2 and 20" (2% of assets under management and 20% of profits).  Because of this additional layer, the fund of funds would need to have a higher return than the multi-strategy fund to give the investor the same return.

The advantages of a multi-strategy manager are longer lockup periods and flexibility to invest in different strategies.  Investors cannot withdraw their capital during the lockup period.  This allows managers to expand their investing universe to less liquid assets.

The disadvantages of a multi-strategy fund manager are:

• Manager may not have the expertise to manage different strategies
• The investor is not diversified in manager selection