A relatively new alternative fund category known variously as multi-alternatives, multi-strategy and multi-manager has been attracting inflows and piquing the interest of numerous financial advisors.
There are 148 funds with some $52.7 billion in assets in the multi-alt category as defined by Morningstar and most of them got their start in the wake of the 2008 crash.
These funds constitute a subcategory of the larger liquid alternative funds universe and are designed to give individual investors exposure to hedge fund-like investment strategies, but without requiring hedge fund minimums or charging hedge fund-like fees.
Multi-manager funds offer a variety of strategies plus access to hedge fund managers in a mutual fund format, explains Josh Charlson, director of manager research for alternative strategies at Morningstar.
The major mutual fund companies are placing a great deal of emphasis on developing products for this category, and theyre competing with firms that are entering this space from the hedge fund side of the industry, like Blackstone. This is creating a lot of interesting funds to choose from.
Multi-alternatives include hedge-fund replication funds, funds with global macrostrategies and other multi-strategy funds that pursue more than one alternative approach, such as long/short and relative value.
Some of these are run by a single manager, but a majority of the funds are multi-manager, employing several investment managers, each pursuing a different investment strategy.
SEVERAL YOUNG FUNDS
Most multi-alt funds are less than five years old. In 2004, according to Charlson, there were only eight of these funds, but by 2008 the number had swelled to 40, and by year-end 2014 they numbered 144.
The growth spurt occurred as investors were seeking safer havens in the aftermath of the 2008 financial crisis.
Around that same time, hedge funds began to experience significant outflows as questions were raised about their gating provisions and management controls, after several highly publicized episodes of fraud.
SMALL HEDGE FUNDS STRUGGLE
Investors who stuck with hedge funds tended to concentrate their assets in a relatively small number of very large high-profile firms, leaving the managers of smaller hedge funds struggling to find new capital inflows. As a result, many more hedge funds became willing to offer a version of their strategies in a mutual fund format with a lower fee structure, as a way to expand their market and seek new sources of revenue, Charlson recounts.
Currently, the multi-alternative category is benefiting from a growing interest in alternative investments.
A lot of investment professionals are pretty nervous, considering that youve got U.S. stock markets at all-time highs and the bond market at a place where it seems unlikely to generate a lot of strong returns, the Morningstar director observes.
Youre seeing advisors wanting to get ahead of the curve and introduce diversification into their clients portfolios in the expectation that there may be another significant market correction.
ONE-STOP SHOPPING
One such advisor is Bob Clark, a senior vice president with the Clark Group of Janney Montgomery Scott.
His three-person group has used alts for more than a decade and is making use of multi-alts to provide one-stop shopping for alternative investments. The group, which is based in Danvers, Mass., has some $130 million in assets under management.
Clark uses several different multi-alts, including the Absolute Return Multi-Manager fund from Neuberger Berman (NABAX).
Some of these funds have equity beta, and others have fixed-income beta, he says. Weve leaned toward the fixed-income beta funds, which weve used for a number of smaller accounts, mainly as a bond alternative.
He describes the multi-alts that his group uses as steady Eddie funds. Theyre not designed to hit the lights out, Clark says. Theyre not designed to strike out. Theyre really trying to hit singles.
While such funds may take on more risk than the typical fixed-income portfolio, he says, in a rising-interest-rate environment they may prove to be less risky than bonds.
You want something that has a low correlation to both stocks and bonds to diversify client risk, Clark says.
Traditionally, we might use fixed income to do that, but in todays low-interest-rate environment, bonds seem more skewed to the downside than to opportunities on the upside. So these funds provide a nice alternative to fixed income in providing a client with a source of steady nonequity correlated returns, Clark adds.
Multi-strategy funds come in two flavors: single- and multi-manager. Representative of the former type is the Tocqueville Alternative Strategies Fund (TALSX), which is headed by managing director Ken Lee.
He says a sole-manager alternative fund has four distinct advantages over its multi-manager rivals: lower costs because fewer managers have to be compensated; a more cogent and consistent strategy due to fewer conflicts among competing managers; better resource utilization, since its funds dont have to be reallocated among managers and 100% of the funds capital is always at work: and greater transparency in the funds activities.
Lee, a former hedge fund manager, says the Achilles heel of multi-manager funds is that each manager is paid based on the assets that he or she manages.
So when it comes time to say, Hey, Manager A, should we leave more in your strategy or should we take it out? Nine times out of 10, the managers going to say, You should give me more money. That, he says, is a conflict, which is not in the best interest of the investors.
By contrast, the Goldman Sachs Multi-Manager Alternatives Fund (GMAMX) employs a broad range of strategies using a diverse lineup of managers.
Managing director Jason Gottlieb sums up the funds core value proposition for advisors this way: Do you really want to spend all of your time trying to figure out not only which asset class is going to do well, but which managers inside those asset classes are going to do well? It takes a tremendous amount of thought and resources and a highly structured framework to really determine this.
THE CASE FOR MULTI-MANAGERS
Janneys Clark is partial to the multi-manager approach. With the multi-manager, multi-strategy funds, you get a lot of different viewpoints and thats going to smooth the funds volatility, he says.
The one major downside to the multi-manager funds, he concedes, is that more managers mean higher fees, so these funds cost more than their single-manager brethren.
Fees and expenses at TALSX, for example, are 1.96% annually, compared with 2.28% for GMAMX. The average for the entire multi-alt category, as calculated by Morningstar, is 2.03%.
In Clarks estimation, the multi-manager alternative funds are worth their relatively high cost.
If we could get fixed income plus 1% or 2% out of these investments over the long term, we would be very very happy, Clark explains. We think this is possible.
But Clark also acknowledges that multi-alts are too new to be proven as an enduring category.
For that reason, he acknowledges, we dont put too many eggs in this basket. But knowing that were starting with at best low returns in fixed income, the risk seems relatively small.
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