Facing the Unique Operational Challenges of Multi-Strategy Portfolios

Looking back on 2023, it is evident it was a remarkable year for multi-strategy hedge funds, often referred to as "pod shops." According to Bloomberg, industry giants Millennium Management and Citadel have returned 10% and 15% respectively in this space. On the back of this success, 2024 has seen the launch of several major multi-strategy launches with Bobby Jain's Jain Global leading the pack initially aiming for a record-breaking launch of $8-10 billion (recently adjusted to $6-8 billion).

While pod shops are not new, their proliferation over recent years coincides with heightened market volatility due to rising interest rates and geopolitical uncertainties. Multi-strategy hedge funds offer a solution to manage this volatility by diversifying their strategies across various pods, each with a specific mandate. The objective is to deliver stable performance while using significant leverage through a rigorous risk management approach to attract investors.

Such an approach can present its own unique set of challenges, of which three critical examples have been listed below:

1. Pass-Through Fee Structures - Multi-strategy funds operate a complex pass-through fee structure to underlying managers, which is made even more complicated across different asset classes. On top of that, multi-strategy funds managing both open-ended and closed-ended vehicles will need specialized accounting and investor servicing staff. A fund administrator who possesses specialized technology that allows for robust valuation across different portfolios and who is able to centralize these values in real time will be critical for multi-strategy managers' risk evaluation and management processes.

1. Reporting Requirements - One key attraction that investors have towards pod shops is the exposure to diversified asset classes, which will not be as readily available as compared to investing in a single fund manager. As such, there is a burden for multi-strategy managers to be able to respond to their investors' capital allocation needs, and with it, their expectation of frequent and transparent risk, attribution and performance reporting. This requires the right people and technology in place to meet such requests, and this might not be cost-effective or scalable for a multi-strategy manager to manage in-house.

1. Adding New Asset Classes - While the process of adding new asset classes at a single fund manager can be much slower and deliberate, this is often not the case at pod shops-especially since new pods have to be swiftly added to diversify risk and support new strategies as the macro-environment demands. Adding new asset classes usually requires connectivity to specialized counterparties such as prime brokers and custodians. The process of starting new connections can be cumbersome-especially if they are done across several portfolio managers. It is therefore critical for pod shops to have access to service providers that offer robust managed services to handle the day-to-day business activities of hosting and managing operational workflows-including reconciliation with downstream settlement counterparties.

SS&C is uniquely positioned to service multi-strategy managers due to our market-leading, multi-asset class, multi-fund accounting solution that eliminates the need for disparate solutions. SS&C's emphasis on straight-through processing, where user intervention is required only for validation such as reviews and approvals, provides not only scalability but also mitigates risk across different pods in a multi-strategy manager. We provide a full suite of customizable reporting tools available to investors through various delivery channels, which is key to providing transparency across the different pods operating on a multi-manager platform.

Download the checklist to discover what operational capabilities a multi-strategy fund needs to generate alpha.