Tuesday, July 30, 2019

What are multi-alternative funds? You cannot tell much from their names

Multi-alternative hedge funds are growing in popularity even though there is an issue of defining exactly what they are and how they should behave. Obviously, if there is more diversification or alternative sources of return within a fund, the return pattern will be different than traditional assets, but it is not clear what will be the beta or correlation with traditional assets. Two funds with similar names could have very different correlations with equities.

The naming convention across the multi-alternative fund choice set is quite wide. Key words within the names include:

  • Multi-strategy, 
  • Alternative strategy, alternative beta, fundamental alternative
  • Global Macro, Macro Opportunity
  • Systematic 
  • Tactical
  • Opportunities 
  • Diversified
  • Multi-style 
  • Alpha, Dynamic alpha 
  • Global Absolute
  • Absolute return 
If a fund can be called the Diversified, Multi-strategy, Multi-style, Alternative, Systematic, Dynamic, Global Macro, Tactical, Alpha, Absolute Return Opportunities Fund, it will have covered all of the key word descriptors. Yet, we would have no idea what it does. 

The difference in returns within the multi-alternative category from Morningstar is significant. The year to date returns have a spread of 27 percent 
between the highest and lowest returning fund and the one year return spread is 24 percent over more than 350 firms.

The name will tell investors nothing about what the fund will do or how it will produce returns. The only easy way to determine what these funds are or can be is through some form of beta decomposition with different indices. Is it fixed income focused or equity focused? What are the conditional correlations or beta? How stable are these relationship? Can these strategies be grouped into style buckets? Of course, this analysis will be subject to the problem of a backward-looking analysis but there is no real alternative beyond using the description of the fund. 

"What’s in a name? That which we call a multi-alternative fund, by any other name could return something different".
In the case of multi-alternatives, a name does not provide much information. 

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