Diversification provides a cheaper alternative to funds of funds
It may turn out that 2006 will be the year of the multistrategy fund, a growing subsector of the hedge fund universe whose returns are theoretically less tied to the performance of any given market benchmark and more dependent on a fund's asset-allocation mix.
Had theory not crashed into reality, that might have been the case for 2005. However, the fact is that this year many multistrategy funds remained heavily allocated to arbitrage strategies, which performed abysmally with the convertible-fund median sinking by - 1.8% and the arbitrage-fund median stagnating at an abject 2.9% on the year through September.
The still-evolving and loosely defined multistrategy space broadly breaks funds down along two lines. The first are so-called diversified multistrategy funds willing to trade a range of instruments that wouldn't seem out of place in a macro portfolio - a small...