Posted inLatest news

Multi-strategy funds – failing to deliver

Benefit of the doubt

Inflows are continuing at a steady pace for the time being. But for how long will investors be giving multi-strategy funds the benefit of the doubt? According to Expert Investor investment sentiment data, appetite for multi-strategy funds is decreasing (see chart), and some investors are already going for the exit: the GARS fund saw its first ever outflows during the second quarter of this year.

Many ‘old-fashioned’ multi-asset funds, which aim to provide stable returns without having the ability of shorting, have delivered similar performance as the prized Nordea Stable Return Fund, so aren’t they an alternative for investors? The issue many investors have with multi-asset funds is that they will not offer any protection if bond and equity markets tank simultaneously. Investors have deliberately chosen multi-strategy funds because these funds could, at least in theory, deliver returns that are uncorrelated to equity and fixed income benchmarks.

Now or never?     

While they are not anymore intending to increase their allocations as enthusiastically, most investors remain intent to keep their allocations steady because they feel they simply need these funds to prepare for a crash. “Some of the funds have not been doing very well,” says Michalis Fessas, head of fund selection at Eurobank in Greece, with a feeling for understatement. “But we still consider them, because we believe they are better equipped to navigate turbulent markets.”

Better days may arrive for multi-strategy funds, but in the meantime investors’ patience is being tested. There definitely is demand for these funds, even though they are expensive and often not very transparent. These days, investors are prepared to make a lot of concessions to mitigate the volatility of their portfolios. But that is not enough for multi-strategy funds to justify their existence. Managers of these funds are lucky that many fund selectors genuinely believe in the diversification benefits of their products. This gives them some extra time to find a way to generate returns. But if they fail to do so, even the most loyal investors will eventually ditch them.

Part of the Bonhill Group.