Analysing 177 portfolios of UK-based financial advisers, Natixis found that the multi-strategy funds (labelled ‘multi-alternatives’ by the report’s writers) used in these portfolios have an average 3-year correlation of 0.6 with global equities. This contrasts with correlations of 0.41 for long/short equity funds and just 0.15 for market-neutral equity funds. The analysed multi-strategy funds show average correlations of 0.26 to global bonds, approximately the same as global equities.
“From a diversification perspective, adding alternatives to the portfolio makes a huge amount of sense,” comments Matthew Riley, head of research at Natixis. “Most investors are choosing multi-alternative funds as their main alternative vehicles when in fact they are the most correlated of all alternative fund types to the wider portfolio,” he added. “Some do offer excellent diversification, however, so careful research and selection is key.”
Concentrated flows
There are reasons to believe that this is not happening sufficiently, since flows into multi-strategy flows are highly concentrated. In the six months to the end of February, just six funds accounted for over half of total inflows, and two (the Standard Life GARS Fund and the Invesco Global Targeted Returns Fund) took the lion’s share of that. Moreover, the three biggest multi-strategy funds harbour half of all multi-strategy assets.
Changing momentum
Multi-strategy funds have been the most popular alternative option for European investors since the second quarter of 2014. This year, net inflows even exceeded €3bn each month until August. In a sign investors have noticed multi-strategy funds are not delivering diversification benefits and returns as good as for example long/short equity funds, net inflows edged down sharply in September to €1.5bn. For the first time since March 2014, more new money flowed into long/short equity funds than into multi-strategy funds over the month.
