Funds of Funds Vs. Multi-Strategy Hedge Funds
Let’s take the performance of the HFRI Fund of Funds index versus the largest multi-strategy funds. The latter, by definition, have open mandates to pursue opportunities wherever and whenever they arise. Managers with billions of dollars of capital at stake have the right incentives and resources to maximize risk-adjusted returns over time.
In the pre-crisis period 2020-2021, risk-adjusted returns between large multi-strategy funds and the HFRI Fund of Funds index (adjusted for the second layer of fees) were comparable. However, in the past five years, the Sharpe ratio of multi-strategy funds was almost double that of the typical fund of hedge funds.
What has driven the outperformance by multi-strategy managers in recent years? In…
