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...