Why multi-strategy funds are ‘ABC, easy as 1-2-3!’

Donald Pepper

Co-CEO & Head of Multi-Strategy

Donald Pepper

Co-CEO & Head of Multi-Strategy
Donald joined Trium Capital as Co-CEO in 2017. He took on the role of Head of Multi-Strategy in October 2024, having been on the Multi-Strategy Investment Committee for several years prior to this. He began his career at Goldman Sachs in 1987 in Fixed Income. In 2000, he started to focus on Hedge Funds in Prime Brokerage at Goldman Sachs and Merrill Lynch, where he was Managing Director of Prime Brokerage in EMEA until 2008, when he moved to become Head of Hedge Funds at New Star Asset Management and Henderson Global Investors, His responsibilities included being Co-Portfolio Manager of two Multi-Strategy Hedge Funds. In 2010, Donald moved to TT International as Investment Director before joining Old Mutual Global Investors in 2012 as Managing Director of Alternatives, where he was a member of the Quarterly Investment Committee and the Style Premia Investment Committee. Donald read Philosophy, Politics & Economics at The Queen’s College, Oxford, where he received an MA. He is a CFA Charterholder and holds the CFA Certificate in ESG Investing.
Trium Multi-Strategy UCITS
Trium Multi-Strategy UCITS Fund

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Trium Multi-Strategy UCITS

Multi-strategy funds have deservedly received a lot of attention, and billions of dollars of assets, in recent years. Highly sophisticated firms, with tens if not hundreds of investment professionals, have generated reliable and compelling uncorrelated net returns with these products. Investors could be forgiven for thinking that multi-strategy funds require a complex philosophy to generate these returns.

However, at its heart, the multi-strategy concept is really quite simple. Multi-strategy funds generally seek to construct a diversified portfolio with three straightforward mantras:

A

Alpha
Plenty of it

B

Beta
Close to none of it

C

Correlation
Very low cross-correlation between the complementary strategies

The concept is not rocket science, and when implemented expertly, can deliver a highly desirable outcome: steady uncorrelated returns that are genuinely diversifying, so providing important defensive qualities in down markets such as 2022.

Foundations for success

The successful execution of multi-strategy funds requires three basic pillars to be in place.

 

1

Talent

2

Portfolio Construction

3

Risk Management

1. Talent

The ability to attract proven portfolio managers who have successfully implemented genuinely uncorrelated strategies is key. By this I mean portfolio managers who have achieved positive returns, in excess of cash, in both up markets and down markets. In a multi-strategy fund, these genuinely alternative strategies, as well as being uncorrelated to markets, should also be structurally diversified from each other. They seek to extract alpha from quite different opportunity sets, so as to reduce fund-level factor risk, particularly in stressed/’risk-off’ markets.

Culture also plays a huge role here. Some firms prefer to keep portfolio management teams separated to avoid groupthink and have an intense intra-day risk management culture. Others prefer a more collaborative culture, albeit with each team free to implement their strategy within agreed risk guidelines, without fear of being second-guessed by a CIO. Talented portfolio managers will gravitate to the culture they find most conducive.

2. Portfolio Construction

Once a team of talented portfolio managers, pursuing differentiated strategies, is in place, portfolio construction is quite straightforward. The inherent low correlation, and low cross-correlation, provides a portfolio of strategies that are low risk in their own right, and when combined may be expected to result in an even lower-risk fund-level portfolio. An important objective in portfolio construction, therefore, is to ensure that enough risk is taken to have a realistic expectation of being able to deliver target returns. A Sharpe ratio of 1.5 may sound good, but it will not lead to exciting returns if portfolio volatility is only 1%.

The multi-strategy structure enables this in two important ways. First, its capital efficiency allows for over-allocation to underlying strategies, increasing exposure while maintaining modest portfolio-level risk due to low overall volatility. Second, it provides the flexibility to dynamically tilt exposure toward strategies with strong forward-looking potential while scaling back on those facing headwinds. Multi-strategy funds can make these adjustments swiftly – often within the same day.

3. Risk Management

This is the other side of the investment management coin. Individual portfolio managers are already doing much of the heavy lifting on risk management as they construct their portfolios to seek to achieve strong risk-adjusted returns.

Additionally, an independent risk team with position-level transparency both at underlying strategy level and at a fund level can then review the fund’s overall market and factor risks. Stress tests and scenario analysis can flag any unintended factor biases and predict how the fund might behave in certain conditions, such as a major inflexion point in markets. It is vital for risk teams to have a deep understanding of how each portfolio manager implements their idiosyncratic strategy. In a multi-strategy fund the risk team’s close proximity to the portfolio managers helps them to achieve this.

Investor alignment

It is easy to see why multi-strategy funds are well-positioned to provide investors with a reliable stream of uncorrelated returns. These returns can be a particularly welcome diversifier in down markets, such as in 2022. As we look forward, in these “interesting times”, such returns may prove very welcome again.

Implementing a multi-strategy approach is not overly complex – it just requires doing some straightforward things well. Moreover, there is a simple way to access this investment approach – via a multi-strategy UCITS fund. UCITS funds typically have a fairer, lower fee structure compared to many Cayman multi-strategy funds, so investors can avoid expensive “pass-through” fees. Unlike Cayman multi-strategy funds, which may have lock-ups and long notice periods for redemptions, UCITS funds also offer very good liquidity, typically allowing investors daily dealing.

Despite their reputation for complexity and sophistication, multi-strategy funds really can be ”ABC, Easy as 1,2,3!”

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