We talk about portfolio diversification that involves investing in two or three types of asset classes that continuously generate a positive return irrespective of directional movement; it involves multi-strategy investing. It is an approach to implement multiple uncorrelated investment strategies to optimise portfolio performance in any market.

The idea is to quantifiably identify the market sentiment, which changes gradually and independent of changes surrounding a single asset or strategy. Multi-strategy involves implementing a combination of techniques to assist diversification – smooth return, reduce volatility and risk, arising from a single asset-class or approach.

A multi-strategy portfolio may involve strategies, but not limited to equities, convertible bond arbitrage, statistical and acquisition arbitrage, and more. What it tries to do is create a balanced outcome by combining different approaches of investment.

Where Did Multi-strategy Originate?

Hedge fund managers are given credits for hypothesising multi-strategy investing. They are specialist in creating a high, risk-adjusted return centred around a core competency.

In multi-strategy investing, fund managers include every asset classes available, beyond which are most common, to create a diversified portfolio and then reduce or increase exposure on various assets, depending on market fluctuations, to create stable return under any circumstance.

What Is Portfolio Diversification, And Why You Need It?

Portfolio diversification means carefully allocating investment into different asset classes and not just holding diversified investment on a single asset class. Multi-strategy proposes investing in several uncorrelated asset classes to reduce volatility and increase return. Keeping multiple investments into the same asset class doesn’t necessarily reduce volatility, they are often highly correlated that increases risk exposure. But when you have several uncorrelated asset classes in your portfolio, it lets you benefit from averaging out market risk. As we have seen in the current situation, when the stock market was erratic, the gold market demand spiked. Hedge fund managers analyse the historical performance of different asset classes to identify assets with uncorrelated return ratios, create a portfolio that minimises volatility and improve return based on individual risk appetite.

What Are The Outcomes Of Multi-strategy Investing?

We have said that multi-strategy will help you get a steady return under volatile market condition. But what does it necessarily mean to you as an investor?

Growth:Growth over an extended period of time at a lower level of volatility than stocks

Income:Generate a steady flow of income in a risk-aware, diversified manner

Absolute Return:Aims to generate consistent return on portfolio across market cycles through investing in uncorrelated asset classes other than traditional stocks

Lifecycle:Generate a flow of return across multiple time horizons

Flexibility:The portfolio adopts a combination of investment strategies and adaptive to the changing market condition

What Is The Benefit Of Investing Using Multi-strategy?

Multi-strategy funds broaden your possibilities to earn from different asset-classes. It recognises that the global market is more interconnected than we think, and one information can influence more than one asset class.

It offers you broad, unbiased opportunities. Fund managers take an agnostic approach while diversifying into different asset classes.

In a risk-first approach, risk managers and portfolio managers work closely to measure, monitor, and fine-tune product portfolio.

What Are Some Of The Risks Of Multi-strategy Investment?

So far, we have introduced you to the details of the multi-strategy investment, and now it’s time to consider the certain risks associated with the approach. Why? So, you can make an informed decision.

One potential risk is to adopt an objective that is not suitable for you, like investing with an aggressive strategy, while a more conservative approach is appropriate per your risk profile. However, if you take a traditional approach, it may impact long-term growth objective. Hence, finding the right strategy is critical for multi-strategy investing.

The Bottom Line

Multi-strategy investing is documented over the years to be an effective measure to shift the risk of a single strategy to multiple strategies to reduce investment risk. Single strategy funds don’t limit market exposure and run the risk of non-performance when the market condition changes, which forces the fund manager to reduce exposure to weather the condition. But multi-strategy allows them to fine-tune and adapt as the market change without altering return expectations.