One of the silent battles within the alternative industry is between those firms developing multi-strategy money and account of money. For investors, the idea of one stop searching for your profile of alternatives is practical. The investor can minimize the fixed cost of studying all the strategies and managers.
You pay a charge to have others perform the due diligence and portfolio structure. As companies get larger and want to diversify their offerings, the multi-strategy strategy makes sense to clean their income also. The problem is the type of structure used to get access to a portfolio of hedge fund strategies.
First, some simple definitions. An account of funds is a framework where investors pay a management charge to professionals to identify hedge funds that may be bundled into a profile. The profile managers are outsiders in accordance with the investment managers. The multi-strategy finance is a package of hedge fund strategies, which may be run by different stock portfolio managers who are employees or partners of the firm that structures or handles the portfolio. A simple table looking at multi-strategy finance and finance of funds can offer details on the differences. We find that the multi-strategy strategy dominates an account of the fund in almost every category except one, supervisor selection.
- Both interest component is adjustable
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The question of what method to utilize for the outsourcing of building a portfolio rests on a simple question. Can the wide search for the best managers through a finance of money dominate the cost advantage and portfolio structuring increases from a multi-strategy strategy? A fund of funds must dominate with finding alpha through skill that skill identification must offset a host of costs and structuring limitations. If the FoF’s skill at finding managers is bound, it has to concentrate on reducing costs and offering other profile alternatives to beat a multi-strategy manager. This might get harder as the number of diversified hedge funds grow.
Direct costs are and only the multi-strategy approach. First, there’s a single fee for the multi-state approach. The account of funds has a double coating of fees. The only way this cost benefit is removed is if the FoF can make a deal lower fees so the total cost is less that the multi-state.
Nevertheless, the multi-strat will dominate with lower administrative costs versus the FoF’s which pay two units, one for the supervisor and one for his or her own fund. This is minimized through a system. The multi-state will dominate since there is one inventive charge instead of the FOF which has to pay bonuses to specific managers.