Are Funds of Funds Simply Multi-Strategy Managers with Extra Fees?

This article examines two approaches that many institutions consider when investing in hedge funds: multi-strategy hedge funds and funds of hedge funds. Since data at the index level is limited for these strategies a number of underlying drivers of risk and return are analyzed. The ability to rapidly move capital between strategies is also examined. Further the differences between the business models of multi-strategy managers and funds of funds and the potential impact for investors are explored. The results show that manager selection dominates strategy allocation for hedge funds. The results also show that the ability to rapidly move capital between strategies can significantly improve the performance of both multi-strategy as well as fund of funds. Finally the results of this article are contrasted with recent research arguing superior performance of multi-strategy hedge funds.