Posted inAbsolute ReturnMulti AssetAlternatives

Multistrategy panacea or placebo

Multi-strategy funds saw net inflows of €3.1bn in January alone, an all-time monthly record, after already having welcomed €15bn of net new money in 2014. As the search for yield has intensified over the past years, it is this type funds which, helped by the Ucits passport, have benefited.
Are multi-strategy funds, with Standard Life’s GARS as the prime example, a lifeboat for investors battered by the record low yields on fixed income? Or is it safer to allocate your money to more specific strategies rather than entrust it to a one-size-fits-all manager?
Javier Hoyos Oyarzabal, an investment manager for Crédit Agricole Mercagestion SGIIC, based in the Basque region of Spain, could be classified as a multi-strategy apostle. “My core strategies in the alternative Ucits space are all multi-strategy funds,” he says. The Basque fund selector is convinced that multi-strategy funds offer the best combination of low risk and a low correlation to equity and bond markets. Moreover, Hoyos Oyarzabal believes combining several multi-strategy funds in a fund of funds (FoF) is the best way to achieve his return target of Libor + 100 basis points, combined with a maximum volatility of 2% pa.
“A combination of multi-strategy funds that have a negative correlation between each other provides you with the lowest possible risk and market correlation,” he says. The two main funds Hoyos Oyarzabal uses in his FoF are Standard Life’s Global Absolute Return Fund (GARS), one of Europe’s most popular investment funds with more than €10bn in assets under management in its Luxembourg-domiciled fund alone, and Fulcrum Alternative Beta Plus Daily. This fund posted a return more than twice as high as its peer-group average over the past 12 months, after a poor performance in 2013. This high volatility, quite unusual for a multi-strategy fund, is exactly the reason Hoyos is invested in it. “We use it to add exposure to market direction, though we typically do not allocate a lot to this fund as it is quite expensive [it charges a performance fee of 10%],” he says.

A bond alternative?

Tristan Delaunay, CEO of Paris-based investment boutique Athymis Gestion, understands alternative Ucits absolute return funds are popular with many of his colleagues. “If you consider that yields on many government bonds are so low and more often than not even negative for shorter durations, you realise this means you are set to lose money as a bond investor,” he says. “If you invest in alternative strategies, you have at least a chance to earn something and you should be insulated from macro risk. The only risk you have is the strategy risk.”
However, Delaunay questions the motives many investors have had to pour so much money into multi-strategy funds, considering these funds were responsible for more than a third of total net inflows into alternative Ucits absolute return funds in 2014.  “Hedge fund returns weren’t good in 2013 and 2014, so some people have just thrown in the towel and have opted for multi-strategy funds as the more specialised strategies did not deliver the returns investors were hoping for,” he asserts.
The Frenchman prefers more specialised absolute return funds, such as the Old Mutual Global Equity Absolute Return Fund, a long/short equity fund with an annualised return of 7.7% combined with averaged volatility of just 5% since it was launched in 2009. “Multi-strategy funds are not necessarily
a safer bet because they have a lot of different strategies at their disposal,” he concludes. Indeed, to claim that would be like claiming that global equity or bond funds are less risky than funds which concentrate on a specific region, simply because they have more options to invest in.

Better risk control

To our knowledge, Delaunay hasn’t spoken recently to Tanja Wennonen- Kärnä (pictured below), a senior portfolio manager for Evli Bank in Finland. But she perfectly fits his description of European fund selectors who are eager to buy more multi-strategy funds: part of her motivation to buy more absolute return lies in her gloomy bond market outlook. On top of that, she is switching from more specialised funds to multistrategy. That sounds familiar indeed.
“There are two reasons we bought a multi-strategy fund,” she says. “The return on the global 


macro fund we owned was disappointing, even slightly negative, so we decided to sell. We also prefer multi-strategy fundsover more specialised funds because risk control tends to be a bit better. “Not all multi-strategy funds are equally transparent though. So we tend to mix them in the portfolios, which means that if one fund underperforms, it can be compensated by the others.”
The fund Wennonen-Kärnä is currently in the process of buying is the Invesco Global Targeted Returns, a fund established in October 2013 by three former GARS managers. The fund, a hit with investors as it outperformed GARS in its first full year, returned 15.6% in 2014 (see chart 1). Alternative strategies should constitute 5% to 10% of a medium-risk portfolio, according to the Finnish fund selector. These funds will replace some of the fixed income exposure of Evli’s clients. “We expect a difficult bond year, so we will be buying more multi-strategy funds this spring,” she says.

Alternative perspective

However, for Rasmus Soegaard, a portfolio manager responsible for alternatives research at Old Mutual Global Investors in London, multistrategy funds are simply too generic. “We don’t invest in this type of fund. Instead, we are multi-strats ourselves,” he puts bluntly. “Lots of people have been buying a fund like GARS as an alternative to the more traditional multi-strategy absolute returns
fund out there, but we prefer to find the best long-short manager, the best global macro manager, and so on. We strive to find the best of breed manager in each category.”
Moreover, Soegaard doesn’t even consider a fund like GARS, though classified as such by Morningstar, an absolute return fund because of its beta exposure through bets on equity, bond and currency markets. “For me, a true multi-strategy doesn’t use beta as a source of return. I do worry that some of these so-called multi-strategy funds on the market today appear as all things to all people, and there is a dangerous misconception that these will continue to deliver positive absolute returns
going forward,” he warns.
When it comes to multi-strategy funds, we see a similar fund selector split to the when we discussed
the use of track record in the January 2015 issues of this magazine: there are those who are massive fans and those who won’t touch it. But there are more reasons for using or not using a fund than simply its investment characteristics, of course. Life is not as neat as that, according to Soegaard. He gives the example of the huge popularity of Standard Life’s GARS fund – and the more recently launched, similar-looking Invesco fund. “For some, it’s also a question of looking for safety in the crowd,” he says. “If you buy what  everybody is buying, you’re less likely to get fired when it all falls apart.”
That said, funds with market exposure such as GARS, Invesco Global Targeted Returns and also the
DWS Concept Kaldemorgen fund (see chart) consistently outperform their peer group average. So, although perhaps not always living up to the rules of multi-strategy orthodoxy, they must be doing something right.

Part of the Bonhill Group.