“When you have a multistrategy approach you end up looking like the market, because all the individual managers can cancel each other’s active management,” says Hal Ratner, global director of research for Morningstar Investment Management. “When you look at them individually they look attractive, but in the context of a portfolio they risk becoming an expense ratio.
Expensive Indexing
Advisors considering these funds need to be mindful that a multi-strategy approach can become a very expensive index fund. “As you get closer and closer to an index, you want to pay less for a fund,” Ratner says. “Looking at statistics such as correlation (r2), tracking error, and information ratio in relation to their expense ratio is useful.”
It can also help to examine a fund’s tracking error in relation to its expense ratio. Funds with low tracking error and high expense ratio are unlikely to outperform the index. Funds that have high tracking errors have the potential to outperform, and this basic distinction is useful in examining the potential for multi-manager funds.
Multialternative mutual funds of hedge funds are appealing and sophisticated but are also young and expensive, leaving room for a wide variety of opinions and producing a disparate range of outcomes in performance and volatility.
“The concept is solid and it makes sense to invest in a multialternative fund, and there are some good managers in the category, but in practice most of the funds that have come to market have been disappointing, so manager selection is extremely important,” Harejs says.