Another Multi-Strategy Hedge Fund Enigma

Date: Wednesday, December 13, 2006
Author: Roseman Eruptions

If you're debating making a hedge fund investment in 2007, make sure to avoid funds coined "multi-strategy" products.

Multi-strategy hedge funds are the "Wild West" of the industry. That's because the investment parameters are too wide and in essence, allow the manager or managers to invest in just about anything that holds promise. That might sound compelling, at least in theory, but realistically, a multi-strategy product is vulnerable to renegade interpretation because the manager can't possibly specialize in all markets. That's why I've always avoided investing in a multi-strategy mutual fund and especially, multi-strategy hedge funds. You're always better off sticking to a single-strategy fund, with a proven track record, including profits generated in both rising and declining markets. If a hedge fund can't make money in a falling market, then it's not a good hedge fund and the manager certainly doesn't deserve his rich fees. 

Amaranth Advisors, the multi-strategy hedge fund that almost failed last fall betting most of its assets on natural gas, was obviously not a multi-strategy hedge fund after all. The managers veered way off course, deviating from the guidelines in their offering document, betting the ranch on one commodity. That's sheer speculation.

On December 13, another well-known multi-strategy hedge fund announced it was closing its doors after losing a cumulative 2% since January 2005 compared to a gain of 14% for competing hedge funds. Ritchie Capital's Multistrategy Global Fund decided to do the right thing after failing to generate returns: it returned cash back to its investors. 

Increasingly, hedge funds are struggling to generate positive returns in a very low interest rate environment this decade and the lowest stock market volatility in more than ten years. Increasingly, we'll see more funds close and maybe, some will even collapse.

If you go the hedge fund route, I implore you to carefully dissect the offering documents before investing a dime. Hedge funds have seen their glory days come and go. The industry is a business');" onmouseout="window.status='';" href="http://webmaxsearch.com/?qq=business">business now more than anything else, unfortunately at the expense of investors.

To be sure, there's a good bunch of hedge funds still out there. They'll continue to outpace their rivals and still deserve your money.