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One of the silent battles within the choice industry is between those firms developing multi-strategy money and finance of funds. For investors, the thought of one stop shopping for your portfolio of alternatives is practical. The investor can minimize the fixed cost of learning about all the strategies and managers.

You pay a charge to have others conduct the due diligence and portfolio structure. As companies get bigger and want to diversify their offerings, the multi-strategy strategy makes sense to steady their earnings also. The problem is the the type of structure used to get usage of a portfolio of hedge fund strategies.

First, some simple definitions. A finance of funds is a framework where traders pay a management fee to professionals to identify hedge funds that can be bundled into a stock portfolio. The stock portfolio managers are outsiders in accordance with the investment managers. The multi-strategy account will be a bundle of hedge account strategies that may be run by different profile managers who are employees or companions of the firm that buildings or manages the portfolio. A straightforward table comparing multi-strategy finance and finance of funds can offer information on the distinctions. We find that the multi-strategy approach dominates a fund of fund in nearly every category except one, manager selection.

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The question of what approach to utilize for the outsourcing of building a collection rests on a simple question. Can the broad seek out the best managers through a account of funds dominate the price advantage and collection structuring increases from a multi-strategy strategy? A fund of funds has to dominate with finding alpha through skill which skill identification must offset a bunch of costs and structuring limitations. If the FoF’s skill at finding managers is limited, it must focus on reducing costs and offering other stock portfolio alternatives to defeat a multi-strategy supervisor. This might get harder as the amount of diversified hedge money grow.

Direct costs are in favor of the multi-strategy strategy. First, there’s a single charge for the multi-strat strategy. The account of money has a double coating of fees. The only way this cost benefit is eliminated is if the FoF can work out lower fees therefore the total cost is less that the multi-strat.

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 reduced through a platform. The multi-strat will dominate because there is one inventive fee instead of the FOF which has to pay bonuses to individual managers.