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Fund Spy: Morningstar Medalist Edition

The Hedge Fund Manager's New Clothes

Multistrategy funds of hedge funds have offered retail investors little for their high fees.

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The last year and a half has provided the first real test for most liquid multialternatives funds to prove their mettle, and while few funds have truly stood out in a positive way, one group in particular stands out for its impotence: multistrategy funds that allocate to various hedge fund managers. The funds are a subset of a broader group of multistrategy funds within the multialternative Morningstar Category. 

These strategies are designed as alternative allocation vehicles. Managers combine alternative strategies, like long-short equity, global macro, and managed futures, into a single fund that can act as the core of an alternative sleeve of a larger portfolio. There are other methods to achieve this, such as a mutual fund of liquid alternative mutual funds, but for the purposes of this article, we will focus solely on managers that are bringing their experience in building hedge-fund-of-fund strategies to a mutual fund. Their goal is typically to reduce overall portfolio volatility by offering diversification to a traditional portfolio of long-only stocks and bonds and to improve risk-adjusted returns. Most don't have specific return targets or benchmarks. They tend to target positive risk-adjusted returns regardless of the direction of broader equity and fixed-income markets.

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Jason Kephart does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.