Morgan Stanley IM: How Multi-Manager Platforms Find Strength in Numbers

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Multi-manager platforms are experiencing a surge in investor interest. Consider this excerpt from Bloomberg article:

“Investors are plowing money into funds that don’t rely on the next macro genius or star stockpicker, but instead offer an army of traders who invest in an array of strategies. These behemoths secured pretty much all of the new money in the hedge fund industry last year, cementing a tectonic shift that’s accelerated since the pandemic.”¹

Why are these vehicles attracting so many investors? How do they compare with traditional hedge funds? What should investors consider if they are interested in them? We tackle these and other fundamental questions about multi-manager platforms in the following FAQ.

1. What are multi-manager platform hedge funds?

Multi-PM hedge funds, hedge fund platforms, or Multi-Manager Platforms (“Multi-PM” or “MMPs”) are investment organizations that employ many specialized hedge fund managers and strategies, collectively operating as one entity, where individual units have discrete P&L responsibilities.

Multi-PMs share several characteristics:

• They are investment vehicles in which the manager oversees a number of independent portfolio management and trading teams.
• Multi-PMs are responsible for integrating risks and overseeing all operational activities, even though decision-making can be centralized or decentralized, and the investment approach can be coordinated or free standing.
• Many are designed as all-weather investments, seeking to deliver absolute return and attractive risk-adjusted returns throughout almost any market environment. Some, less concerned about neutrality, seek to concentrate the best ideas into a mix of bottoms-up/top-down portfolio construction methodology. Others apply thematic tilts to the portfolio, trying to take advantage of investment trends, momentum or short-term market moves.
• Multi-PM platforms deploy capital across many multi-asset opportunities, including a wide variety of fundamental and quantitative strategies.
• They manage the risks generated by the underlying investment teams, relying on substantial investments in technology and expert teams of investment and IT professionals.

2. Broadly speaking, what are the potential advantages for the client of a Multi-PM platform over the traditional, single-manager hedge fund?

Managers of traditional hedge funds are typically sophisticated specialists and gifted investors, employing any of almost three dozen strategies, as defined and classified by organizations such as Hedge Fund Research, Eurekahedge, or Preqin. Investors must not only select which hedge fund strategy is best for the prevailing environment, but also which manager is best positioned to execute the strategy. Consequently, single-manager funds tend to carry net exposures and trading betas associated with their particular strategy. More often they are amplified forms of the manager’s investment views, leading to highly correlated ideas and holdings. In many cases, portfolio construction and risk management tend not to be as sophisticated as their core investment management expertise.

A multi-manager platform offers a range of diversified alpha sources and centralizes the risk management function. The independent managers are thus free to put their talents to their highest and best use. The platform manager devotes a comparable level of expertise to managing risk, ensuring, for example, that all unwanted exposures are hedged and that the independent investment managers are within risk budget guidelines. Simply put, many Multi-PM funds consistently deliver their investment objective and target volatility.

3. Broadly speaking what are the potential disadvantages?

Multi-PM platforms are operationally complex structures that demand a wide range of capabilities from the platform manager, which entails a high-level commitment of time, resources and expertise.

The platform manager must be able to attract and retain multiple talented investment teams, allocate assets, and establish and enforce risk budgets. They must hedge the overall risk exposure of the independent managers and minimize the correlation of their performance. Multi-PMs must also manage high turnover rates while sourcing specialists and developing talent.

Thus, investor due diligence of Multi-PMs must take into account skillsets and infrastructure that in many ways are markedly different from single-fund managers. The same is true when considering different Multi-PMs and assessing the likelihood of consistent alpha generation. Moreover, the due diligence task is sometimes hindered by inconsistent or obscure reporting, limited investment transparency, and fee opacity.

4. How many of these sophisticated specialist investors are there and how big is the universe?

There are over 8,800 hedge fund managers, according to Preqin, a leading provider of hedge fund intelligence, and in the same AIMA headcount study,² it was estimated in North America that there are 78,500 hedge fund employees with an average number of 19.7 employees per fund manager. Estimated employees in Europe and Asia Pacific were 21,000 and 11,700, respectively. Typically hedge funds are evenly split between investment and non-investment professionals, suggesting 55,600 in the total hedge fund talent pool. However, this broad population represents all hedge fund strategies and not the narrower set the Multi-PM platforms employ.

Focusing on just Multi-PMs, we believe there are roughly 9,500 investment professionals across more than 30 firms worldwide. Both the quantity and quality of trading talent have grown with the strategy. From 2008 to 2021, Multi- PMs expanded almost 50% faster than the industry³ and during this period more and more investment professionals learned to hone their skills, making them attractive to this style of investing. Right now the universe of trading talent has never been larger.

¹ Source: Bloomberg, “An Army of Faceless Suits is Taking Over the $4 Trillion Hedge Fund World,” January 30, 2022, Nishant Kumar

² Source: https://www.aima.org/educate/hedge-fund-industry-data.html. As of March 31, 2022.

³ eVestment (Source: Bloomberg, “An Army of Faceless Suits Is Taking Over the $4 Trillion Hedge Fund World,” January 31, 2022, Nishant Kumar)

^{DEFINITIONS
HFRI Fund Weighted Composite Index (“HFRI Fund Weighted”): The HFRI Fund Weighted Index is a global, equal-weighted index of single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in USD and have a minimum of $50 million under management or $10 Million under management and a twelve-month track record.}

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