The Evolution of Multi-Manager and Fund-of-Funds Strategies in Hedge Funds
In today’s global investment landscape, aggregating multiple strategies has become essential to fully capture the diverse opportunities available. The vast scale of global markets, combined with the specialized knowledge required for niche segments, means that many of the best sources of stable alpha1 lie beyond broad-market approaches. By investing in a range of strategies, investors can tap into these unique areas, building a more resilient portfolio that better aligns with the complex and evolving nature of hedge fund2 investing.
As the hedge fund market matured, two distinct strategies emerged to provide investors with distinct alpha sources combined in a singular portfolio to achieve lower volatility3: Fund of Funds4 and Multi-Manager5 structures. Fund of Funds structures traditionally aggregated investments in distinct hedge funds across strategies in a separate vehicle, providing portfolio management via investment allocations and sizing. Multi-Manager structures on the other hand, traditionally aggregated Portfolio Managers (and their trades) within a singular asset manager and vehicle, proving portfolio management via the risk management6 of the aggregated trades across strategies.
The hedge fund industry has undergone major shifts over the past decade. During this time, fund-of-funds vehicles lost some prominence as multi-manager structures grew more sophisticated. Fund-of-funds faced criticism for not providing significant added value in portfolio construction7, as they often focused primarily on access to hedge funds rather than a strategic, risk-adjusted approach.
Recently, however, multi-manager platforms have seen rising competition for talent leading to what many consider an “arms race” with impact on costs, limited capacity and greater dispersion of results. At the same time, fund-of-funds vehicles have gained access to advanced tools like derivatives and segregated accounts8, allowing them to customize exposures and compete more directly with multi manager platforms. This shift has allowed them to regain relevance by enabling a deeper risk perspective, with insights into manager traits, daily asset pricing, and metrics such as drawdown9, volatility, and correlation10, closely mirroring the level of oversight found in multi-manager structures.
Today, the distinctions between these approaches are increasingly diluted, creating a new standard for hedge fund allocations. Understanding this evolution highlights why a modern fund-of-funds approach, incorporating elements of multi-manager investing, has become a powerful strategy. By using these tools and frameworks, fund-of-funds can tap into a broader talent pool, including managers outside of traditional multi-strategy platforms.
A Historical Perspective
In the early years of hedge funds, most firms were managed by a single portfolio manager (PM) or a small team responsible for all investment decisions. Over time, the need for diversification11, especially post-2008 global financial crisis, led to the emergence of the multi-manager model, where multiple PMs manage distinct strategies within a centralized structure. This shift represents a new investment philosophy, where the traditional investment team becomes almost secondary. Alpha generation is now ‘industrialized,’ and the central figure in this structure is the risk officer, who monitors managers’ drawdowns, volatility, and correlations rather than focusing solely on the managers themselves. The era of the brilliant ‘star’ individual has been replaced by a structured, industrialized approach. In this framework, the emphasis is on a robust system that integrates multiple strategies cohesively, prioritizing risk control over individual decision-making.
This model has grown rapidly, with multi-manager hedge funds’ AUM expanding by 175% between 2017 and 2023, compared to only 13% growth in the broader hedge fund universe. The largest firms in this space now manage substantial volumes, with assets under management exceeding $50 billion each. They operate with large, highly structured teams, often employing hundreds of portfolio managers and specialized analysts, each focused on distinct strategies within a centralized risk management framework. This scale and organization enable these firms to efficiently diversify across multiple asset classes and regions, stabilizing returns and controlling risks, creating a resilient structure capable of navigating complex market environments.
This recent rapid growth and evolution of the multi-manager hedge fund landscape has prompted industry debate over whether the multi-strategy market has reached “peak platform.” Although there is no definitive answer, it is expected that the most innovative multi-manager platforms will continue to thrive, while others may struggle to still be competitive. Some large platforms have already returned capital to investors to avoid diluting returns, acknowledging the challenges of deploying additional capital effectively.
While multi-manager platforms may continue to capture significant expertise, there remains a substantial pool of skilled managers outside these platforms. Many talented hedge fund managers choose to operate independently, driven by entrepreneurial goals or a preference for strategies not suited to the multi-manager model’s strict portfolio and risk requirements.
To fully harness available talent and maximize alpha, investors should consider complementary formats and structures, such as fund-of-funds, which can now leverage new tools to access talent, manage risk, and customize allocations. Utilizing both multi-manager and fund-of-funds structures significantly broadens the talent pool available for investment.
Crossing boundaries Between Multi-Manager and Fund-of-Funds
The distinction between multi-manager and fund-of-funds has recently narrowed with Fund-of-funds, traditionally relying on pooled vehicles, increasingly utilising segregated accounts and structured notes to gain customised exposure and adjust leverage levels in real-time. This shift allows fund of funds to expand their investment universe and also to have more tools to manage the portfolio, such as leverage12 adjustments and strategy customisation.
At the same time, in an interesting twist, multi-manager hedge funds now also incorporate third-party managers through segregated accounts (SMAs)13. This evolution enables fund-of-funds to monitor their portfolios with a much more refined risk perspective. They gain access to managers positions and daily asset pricing, allowing them to precisely understand each manager’s drawdown, volatility, and correlation. As a result, fund-of-funds can manage these metrics almost as effectively as a risk officer within a multi-strategy structure, achieving a similar strategic outcome.
Another key factor contributing to the convergence between multi-manager hedge funds and fund-of-funds is the adoption of pass-through fees14 by multi-manager platforms. As competition for talent increases and with that its associated costs, multi-manager firms have used a “pass-through” fee structure, where operating expenses—including talent acquisition costs, technology investments, and administrative expenses—are directly passed on to investors rather than being absorbed by the firm. This fee model shifts away from the traditional approach, where clients would pay a single fee to the multi-manager fund, covering all of its portfolio managers as part of overall fund expenses. Now, investors pay both the multi-manager fund and also cover fees for each individual portfolio manager separately. This structure closely resembles that of a fund-of-funds model, where investors pay for access to multiple independent managers.
Skill and Portfolio Construction: The Core of Modern Hedge Fund Success
In today’s investment landscape, particularly in the alternative space, where strategies are increasingly complex and interconnected, the true competitive edge lies in the dual abilities to identify top investment talent and construct an optimal portfolio and less on the structure used to access it. Both multi-manager platforms and fund-of-funds face the critical challenge of skill aggregation—sourcing diverse, high-caliber managers and integrating their distinct skills into a cohesive, balanced portfolio. Investors are no longer satisfied with isolated strategies; they seek a skill-driven approach where a manager’s expertise is not just sourced but expertly woven into a structure that enhances the overall portfolio.
This task demands a sophisticated understanding of portfolio construction and risk premia. Managers must select and blend complementary investment talents, ensuring each one contributes to a robust mix of alpha sources, risk mitigation, and minimal correlation with other strategies. The art and science of portfolio construction have become as crucial as identifying talent itself, as the ability to combine skills into a balanced, well-risked portfolio can magnify the benefits of each manager’s strengths while reducing downside risks.
Farview: A Result of This Evolution
Farview is at the core of this evolution in hedge fund investing. As a manager of fund-of-funds vehicles, it incorporates elements of the multi-manager model, starting with a foundation in risk management and portfolio construction blended with the flexibility to allocate capital to third-party managers. This approach allows Farview strategies to capture diverse alpha sources, manage risk effectively, and offer investors access to a unique combination of uncorrelated strategies. By navigating the boundaries between traditional fund-of-funds and multi-manager structures, Farview positions itself at the forefront of modern alternatives investing, emphasizing the importance of skill aggregation in generating sustainable returns.
We believe that the shift towards blending multi-manager and fund-of-funds strategies reflects the broader evolution in the investment industry. Investors now have access to sophisticated, diversified platforms that combine internal and external talents, offering greater opportunities to identify and harness skill factors across the market. A key element in achieving a successful outcome lies in rigorous portfolio construction, designed to avoid geographic concentration, style concentration, or reliance on individual managers. Our approach builds a portfolio that is independent of specific factors or singular styles, carefully structured for diversification and resilience. This disciplined oversight allows us to align with an established objective, creating a portfolio prepared to adapt to market dynamics while delivering consistent, risk-adjusted returns. Farview Global Alpha embodies this trend, serving as a solution for those seeking diversified exposure to liquid15 or less liquid hedge funds through a carefully curated combination of strategies.
Reference: Industrializing Alpha: A Look at Multi-Manager Hedge Funds and Modern Allocation Strategies
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Alpha: A measure of the excess return of an investment relative to a benchmark index. In hedge funds, it often refers to the skill-based returns generated by fund managers, separate from market-driven performance.
Hedge Fund: A pooled investment fund that employs a variety of strategies to earn active returns for its investors. Hedge funds are typically less regulated and can use leverage, derivatives, and short-selling to achieve their goals.
Volatility: A statistical measure of the dispersion of returns for a given security or market index. Higher volatility often indicates greater risk, as it reflects larger fluctuations in asset prices over time.
Fund-of-Funds: An investment vehicle that allocates capital to multiple hedge funds, providing investors with a diversified portfolio by investing across different fund managers and strategies. This model aims to achieve broad exposure to various sources of return.
Multi-Manager: An investment model where multiple portfolio managers (PMs) manage distinct strategies within a single structure. This approach aims to combine diverse talents and strategies to achieve a balanced, diversified portfolio with centralized risk management.
Risk Management: The practice of identifying, assessing, and prioritizing potential risks to a portfolio and taking steps to minimize or control them. In hedge funds, risk management often involves monitoring metrics like volatility, drawdown, and correlation to protect capital.
Portfolio Construction: The process of selecting and combining investments in a way that achieves diversification, manages risk, and targets specific performance goals. Effective portfolio construction is key to creating a balanced investment strategy.
Segregated Accounts: Investment accounts that are maintained separately from the main fund to provide customized exposure to specific assets or strategies. Segregated accounts allow for tailored risk management and leverage adjustments.
Drawdown: A measure of decline from a portfolio's peak value to its lowest point. Drawdowns help assess the risk of an investment strategy by showing how much value it can lose in a downturn.
Correlation: A metric that describes the relationship between the movements of two assets. Low or negative correlation between assets in a portfolio indicates diversification, as the assets don’t move in tandem, helping to reduce risk.
Diversification: A strategy that involves spreading investments across different assets, sectors, or geographical regions to reduce exposure to risk. By diversifying, investors aim to balance risk and reward in a portfolio.
Leveraging/Leverage: The use of borrowed capital or financial derivatives to increase the potential return of an investment. While leverage can amplify gains, it also increases potential risks.
Managed Accounts: Accounts where a portfolio is managed on behalf of the investor, often allowing for customization in terms of strategy, risk tolerance, and investment goals. Managed accounts provide greater transparency and control compared to traditional pooled funds.
Pass-Through Fees: A fee structure in which certain operating expenses, such as talent acquisition, technology investments, and administrative costs, are directly passed on to investors, instead of being absorbed by the management company.
Liquidity: Refers to how easily an asset or security can be converted into cash without significantly affecting its market price. Hedge funds may invest in both liquid (easily tradable) and illiquid (harder to trade) assets, depending on their strategy.