Successful hedge fund selection can be an uphill task. Overall, smaller funds tend to outperform larger funds, but often come with a higher level of business or operational risk. At the opposite end of the spectrum, larger funds that have done well in the past may close their funds to new capital to preserve trading flexibility or, worse, may fall victim to their own success as their focus shifts from generating performance towards preserving management fees off the larger asset base. Either way, the universe of attractive, larger funds can be limited.
Investors worried about the wide dispersion of hedge fund returns do have options, however. One solution has been to invest in funds that take a multi-manager approach. By doing so, investors can avoid putting all their eggs in one basket and may get access to hedge funds across the size spectrum and across a diverse array of investment styles. Further, these funds are typically overseen by an experienced allocation manager, who is responsible for manager selection, risk management and ongoing allocations within the portfolio.
Jeff Brozek – EACM, A BNY Mellon company