The core engineering of a multi-strategy fund allows it to achieve high returns on low volatility (e.g., 10% on 5 vol). This is because diversification and centralized risk management enable the fund to net out opposing positions internally, avoiding the need to hold separate capital for each side of a trade.
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A diversified alternatives manager gains a significant advantage by seeing pricing across public equity, private equity, debt, and royalties simultaneously. This cross-asset visibility allows them to identify the best risk-adjusted return for any given opportunity, choosing to structure a royalty instead of buying equity, for example.
The firm's "Capital System" combines top ideas from various analysts and portfolio managers into a single fund. This structure deliberately avoids exposure to any single manager's low-conviction holdings, creating what is effectively a "best ideas" portfolio.
A portfolio's performance can be dramatically enhanced by combining traditionally separate strategies. A leveraged mix of equities (S&P), hedges (long volatility), and trend-following strategies can produce returns that are multiples higher (e.g., 40x) than equities alone (e.g., 6-7x) over the same period.
In a TPA model, diversification is a total-portfolio responsibility. This frees individual teams from needing to diversify within their silo. They can build more concentrated, high-conviction portfolios, as their contribution is assessed at the whole-fund level, where diversification is achieved across different strategies.
To overcome LP objections to layered fees, fund-of-funds must deliver outsized returns. This is achieved not by diversification, but through extreme concentration. By investing 90% of capital into just 10-13 high-potential "risk-on" funds, the model is structured to outperform, making the additional management fee and carry worthwhile for the end investor.
A fund manager's fiduciary duty incentivizes them to trade potentially higher, more volatile returns for guaranteed, quicker multiples (e.g., a 3.5x over a 7x). Unlike a personal investor who can accept high dispersion (big winners, total losses), a GP must prioritize returning capital to LPs like pensions and endowments.
Instead of allocating a large sum to a low-volatility alternative, investors should allocate a smaller amount to a higher-volatility version of the same strategy. This provides the same dollar exposure to the alpha source but is more capital-efficient, freeing up capital for other uses and reducing manager risk.
Multi-manager hedge funds ("pods") isolate pure stock-picking skill by hedging all systematic risk. Their 1.5-3% alpha from long-short portfolios suggests the maximum achievable alpha for a long-only manager is practically capped at 50-150 basis points, providing a theoretical limit for active management.
A 50% portfolio loss requires a 100% gain just to break even. The wealthy use low-volatility strategies to protect against massive downturns. By experiencing smaller losses (e.g., -10% vs. -40%), their portfolios recover faster and compound more effectively over the long term.
The dominance of multi-strategy hedge funds, which run market-neutral books, prevents the "correlation goes to one" phenomenon seen in past crashes. When forced to de-risk, they sell longs but must also cover shorts, creating offsetting price action and preventing a uniform market drop.
