Sebastian Mays
Institutional investor demand for an increasingly wide variety of non-traditional asset classes and sectors has driven the expansion of multi-manager alternative investment strategies, particularly within private markets. These offer diversification without the resourcing and administrative burden associated with overseeing a long list of single manager funds.
Business Development Director at bfinance, Sebastian Mays, said: “The economic landscape is uncertain and more volatile than it has been in the previous decade, with stubborn inflation and rising interest rates effecting markets globally. As a result, investors are increasingly seeking alternative asset classes that offer diversification, downside protection, upside capture or low correlation to traditional assets as a way of navigating turbulent markets.”
Major industry trends have facilitated the evolution of the multi-manager sector. These have included: investor diversification across an increasingly broad and deep landscape of alternative investment strategy types; a changing investor base for alternative investment strategies with newer entrants including institutional (DC pension) and non-institutional (wealth) clients; a major wave of asset manager M&A activity that has seen asset management firms buying up numerous alternative investment boutiques or teams; and the pivot of investment consultancy towards (more lucrative) fund management activities, wherein multi-manager alternative investment strategies have proved to be a major area of focus.
Four headline changes of note include: a move from commingled funds to highly customised partnership-style strategies, the emergence of ‘multi-asset private markets’ offerings from 2017 onwards, the advance of (what this paper terms) in-house fund of funds and a very different landscape of providers that features alternative and traditional investment managers, investment consultants and tech-enabled aggregators.
Benefits of multi-manager investing
Multi-manager strategies are less resource-intensive for the investor, allowing for diversification across multiple drivers of return. They can also potentially offer higher liquidity in typically illiquid sectors, depending on the strategy, and may offer a reduction in the ‘J-curve’ effect in private markets.
Challenges of multi-manager investing
Key challenges include conflicts of interest with more layers of separation between clients and assets, increased complexity, potentially high fees (depending on the approach), and low visibility on many parts of the manager universe.
The paper proposes and defines four major categories of multi-manager strategy, which can be presented on a spectrum from those that are more ‘product-focused’ to the more ‘solution-focused’ offerings. Some of these, such as the ‘internal fund of funds’, are not pitched outwardly as multi-manager strategies but should—the authors argue—be considered as part of this family.
Single Asset Class FoF
This model is favoured by asset class specialists in private markets. These vehicles typically provide access to external managers and have especially strong appeal in asset classes where even well-resourced investors would typically find it difficult to develop appropriately diversified single-manager portfolios, such as Venture Capital. Single Asset Class FoFs typically require a double layer of fees and low liquidity.
Internal FoF
These umbrella structures represent a way of packaging multiple in-house strategies in a single product. Such funds may also feature co-investments and secondaries and tend to be less diversified than fund of funds that use external managers. Within private markets, many Internal FoF are focused on a single asset class, overlapping with Single Asset Class FOFs, while others cover multiple asset classes—helped by the wave of M&A activity that has seen asset management firms adding multiple alternative investment capabilities. Within the hedge fund space, internal FoFs are more commonly known as ‘multi-strategy’ hedge funds – now the second most popular hedge fund strategy type and the subject of a separate new report from bfinance following a period of outstanding performance and popularity.
Diversified FoF
Portfolios in this group are diversified across multiple asset classes and sectors, with strategic and tactical asset allocation/risk budgeting determining the fund’s exposures. In liquid alternatives, these conventional fund of hedge fund strategies offer exposure across multiple hedge fund styles, while in private markets the period from 2017 onwards has seen the rise of truly diversified FoFs that combine real assets, credit and equity into a single offering. While this strategy offers good diversification across asset classes and styles, it is very complex.
Customised FoF
The most solution-focused, Customised FoFs are diversified strategies offering a high degree of partnership with a specific investor. These use an open architecture approach to give the investor access to a broad variety of underlying strategies with strong support on asset allocation, tactical repositioning, cashflow management and more. Products are very complex and a high degree of knowledge transfer should be required. This model primarily refers to strategies that span multiple asset classes, and can be expensive, particularly for those that make greater use of direct investments.
Kathryn Saklatvala, Head of Investment Content at bfinance, said: “The landscape of multi-manager alternative investment offerings available has evolved dramatically, giving investors new choices, though it can be challenging to assess and compare these complex strategies. We hope that this report provides a helpful framework with which to think about types of multi-manager strategy and their applications. More broadly, as a matter of good governance, investors may wish to consider an appropriate frequency for re-evaluating and re-underwriting their operating model for investment outsourcing across the whole portfolio, including the number and type of asset manager relationships and the appropriateness of direct versus fund versus multi-manager investing. Conclusions of these reviews may—and probably should—change as both the investor and the industry/products evolve.”
