Just What The Hell Is A Multi-Manager Investment Platform Anyway?
At Valmar, we routinely ask ourselves a fundamental question: how can we seamlessly integrate the robust principles of traditional finance, including rigor, risk management, and execution, with the nuances and rapid development of digital assets? This question serves as a foundational building block for the vision and the structure of the firm. To get a deeper understanding of what we mean by this, a brief history of hedge funds may be in order.
Alfred Winslow Jones kicked things off in 1949 creating the first market neutral portfolio. By 1952, he introduced a pooled investment vehicle that employed leverage and charged a performance fee, effectively birthing what would be recognized as the first "hedge fund". After years of outperformance against the market (and an article in Fortune in 1966), word got out and, within a few years, some 140 hedge funds emerged, attracting future titans such as George Soros and Warren Buffet. In those early days, hedge funds specialized in a single strategy.
However, the momentum of the 1960s eventually waned, recession hit, the stock market crashed, and many funds suffered heavy losses and/or were wiped out by the mid-1970s. Investors generally lost interest until the mid-1980s when hedge funds started generating strong performance again. At the start of the decade, hedge fund assets measured in the hundreds of millions, but by the end of the decade, they would be in the billions, led by the success of Julian Robertson’s Tiger Fund.
The burgeoning interest in hedge funds continued throughout the early 1990s. During this period, hedge fund strategies dramatically expanded to include credit arbitrage, distressed debt, fixed income, quantitative, and multi-strategy approaches (pay attention). Hedge funds attracted increasingly large amounts of capital from institutional investors like endowments and pension plans, and names like Steve Cohen at SAC Capital and John Paulson at Paulson & Co. emerged as prominent figures within the industry.
The dot-com crash of 2000 certainly hurt the industry - Tiger Management collapsed and closed - but pales in comparison to the seismic losses suffered during the 2008 financial crisis. Many funds closed their doors, while regulators such as the SEC introduced more rigorous oversight via regulations like Dodd-Frank. Despite those market bumps and greater scrutiny, the industry has rebounded greatly since then, amassing record assets under management. New fund launches are outpacing fund closures, and a new asset class, cryptocurrencies, is further expanding the industry’s boundaries.
Through the booms and busts, the industry has displayed remarkable resilience, growing in size and sophistication. Of course, there are invaluable lessons to be learned in its evolution, especially when considering the application of these insights to investment management – the original question we posed.
Well, the first and foremost lesson pertains to approach and structure: the success of the largest and most enduring traditional hedge funds is often attributed to their adoption of a multi-manager, multi-strategy investment platform approach. Traditional multi-strategy platforms such as Millenium Management, Brevan Howard, ExodusPoint Capital Management, and Bridgewater Associates have all withstood the test of time and have grown and generated consistent returns. As a result, Valmar envisions harnessing the same approach, along with its inherent advantages, and integrating it into the realm of digital asset investment management.
This raises another pertinent question: what are the key benefits of a multi-strategy investment platform approach, and what have the aforementioned firms gotten so right?
For investors, the approach provides:
Diversification - Spreading risk across multiple funds and/or strategies reduces the risk of the overall investment program. Multi-strategy funds maintain the flexibility to capitalize on the best market opportunities at any given time by adjusting the weight of strategies within the portfolio; single-strategy funds are limited in the scope of their investment opportunities. When the specific source of alpha of a single-strategy fund wane, either temporarily or permanently, managers may reduce exposure by shifting into cash or remain invested in sub-optimal opportunities. Conversely, multi-strategy funds possess the capacity to reallocate capital from less-attractive strategies to those that offer superior potential. Moreover, multi-strategy funds tend to offer investors superior capacity as investor capital is allocated across several strategies.
Access to a Broad Range of Managers/Strategies - It is the mandate of multi-strategy investment funds to provide broad diversification to the best strategies. Accordingly, these funds are structured to entice compelling managers and strategies, and to invest in them via internal or external investment “pods.” The firm offers advantages that compel managers with limited capacity to become investment pods (more on this to follow).
Active Portfolio Management and Optimization - Allocation to chosen strategies is not made ad hoc. Instead, the multi-strategy manager meticulously constructs a weighted portfolio from an array of diverse strategies, each calibrated to achieve a targeted risk-adjusted return and expected volatility. The portfolio is monitored on an ongoing basis to adjust allocations for optimization. Should certain strategies become compressed, they can be promptly replaced in the portfolio. Notably, these reallocations can occur in real time, free from the redemption and liquidity constraints often associated with traditional fund of funds structures. This active management allows for the portfolio to necessarily evolve over time.
Active Risk Management and Portfolio Hedging - The multi-strategy manager also serves as an active risk manager and an additional layer of risk management for the strategies within its portfolio and the portfolio as a whole. Trading activity, exposures, liquidity, and limits for each strategy and the blended book are regularly monitored in real time to ensure activity is within expectations and that limits are not breached. If necessary, portfolio positions can be actively hedged, and in a worst-case scenario (such as a black swan event like the FTX debacle), positions can be liquidated and trading halted.
Active Management of Liquidity Reserves - Naturally, there are times when it makes most sense to be largely liquid and uninvested, or to at least hold a portion in cash. During these times, instead of idling sitting on piles of money, the multi-strategy actively manages those liquidity reserves via low-risk yield strategies.
As previously mentioned, the ability to offer the finest managers and strategies to investors is a fundamental objective for multi-strategy firms. To achieve this, these firms must present an attractive proposition to managers. As such, the multi-strategy firm must be able to offer capital and assistance with future capital needs, best-in-class trading technology, and robust operational infrastructure, allowing the manager to focus purely on generating returns and managing risk for their strategies. By meeting the needs of the manager, these firms concurrently cater to the needs of investors.
While the realm of digital assets holds immense promise, certain challenges have hindered its full scalability and broader investor adoption, leaving substantial investor capital on the sidelines -particularly institutional capital, which has historically driven the traditional hedge fund boom. Both investors and portfolio managers grapple with obstacles that must be addressed to unlock the true potential of this asset class.
From the investor's perspective, digital assets present a complex and esoteric landscape, dissuading potential adopters. The opaqueness and esoteric nature of these assets leave investors uncertain about their actual value and potential. Moreover, the heightened volatility adds an element of risk that makes some hesitant to participate in this market. Furthermore, the limited availability of institutional-grade options constrains investors' ability to confidently navigate and diversify their portfolios.
The prevailing fund offerings predominantly adhere to a narrow approach characterized by single strategies and managers. This limited array forces investors into a difficult decision between high-profit potential accompanied by extreme volatility, or lower profit potential with comparatively lower volatility but heightened counterparty risk. This binary selection does not cater to the diverse needs and risk appetites of investors, thus restraining broader market participation.
On the portfolio manager side, barriers to entry and operational complexities impede growth and innovation. Access to capital remains a significant hurdle, hindering talented managers from realizing their full potential. Adding to the operational burden is the highly fragmented and nascent nature of digital assets trading, portfolio management, and risk management infrastructure. Additionally, the cumbersome processes involved in setting up and marketing investment vehicles often distract managers from their core mission of generating returns for their clients. In short, the complexities of establishing an institutional grade operation takes significant time away from a portfolio manager’s primary goal of generating returns and managing risk.
Valmar is poised to tackle these challenges head-on by constructing an innovative multi-strategy and multi-manager platform that spearheads the advancement of digital assets.
To meet investor’s needs, we commit to enhancing transparency and providing comprehensive education on digital assets. Through these measures, we can instill confidence and attract a broader and more institutional investor base. Furthermore, our emphasis on diversification, robust risk management practices, and the institutional-grade attributes of our team, infrastructure, technology, and operations will effectively assuage risk concerns.
Facilitating access to capital and alleviating operational burdens by offering a plug-and-play technology platform will be key to attracting top managers to our platform. By fostering an ecosystem that supports and empowers managers, we enable them to focus on generating alpha, ultimately leading to better outcomes for investors.
By applying the multi-manager, multi-strategy model to digital assets, we establish a familiar home for institutional capital—one that scales seamlessly alongside the family. Next week, we will embark on an in-depth exploration of the various single strategies that exist within the realm of digital assets, offering insights into the diversification possibilities among them.