By Fredrik Langenskiöld – Union Bancaire Privée: Multi-strategy funds are those that allocate to more than one alternative strategy or portfolio manager (PM) in a single vehicle. There are multiple models, but we can split them into two main categories. First, there are traditional multi-strategy funds, which use a combination of discretionary trades and quantitative signals. These are set up either as platform structures with multiple independent risk takers (‘multi-PM’), or a single CIO or risk taker (‘single-PM’) model, which use ideas generated internally from investment staff across a firm. Then comes systematic multi-strategy funds, which are purely systematic, using a combination of uncorrelated models and strategies across highly liquid markets across multiple asset-classes.

While multi-PM funds have historically seen the highest level of interest from investors, systematic multi-strategy funds have recently seen a strong pick-up in demand, particularly since 2022, a year in which they delivered, as a group, attractive positive returns in difficult equity and fixed income markets. In this paper, we will focus on this model which provides, in our view, the higher level of diversification to traditional assets.

The background to systematic multi-strategy funds

The systematic multi-strategy (SMS) segment emerged from decades of progress in systematic trading, driven by market efficiencies, fierce competition, and major technological and operational advances. Quantitative researchers broadened their methods and scope, leveraging machine learning, large-scale simulations, and an explosion in available datasets. This enabled expansion into new, liquid instruments such as non-deliverable forwards (NDFs) and swaps, as well as into global markets across developed and many emerging economies, constrained mainly by liquidity and regulation.

The industry shifted from specialist managers – i.e. those focused on long-term momentum, carry, or short-term inefficiencies – to diversified, technologically advanced firms building multi-strategy portfolios designed to perform across varied market regimes and reduce single-strategy drawdowns.

“SMS [systematic multi-strategy]growth reflects convergence from different origins: quantitative equity specialists extending into derivatives and macro managers, and traditional multi-strategy hedge funds evolving towards systematic approaches.”

SMS growth reflects convergence from different origins: quantitative equity specialists extending into derivatives and macro managers, and traditional multi-strategy hedge funds evolving towards systematic approaches. While a firm’s heritage influences nuances like strategy and market mix, SMS managers share a fundamental commitment to systematic processes: data-driven research, disciplined implementation, and robust risk management. Collectively, they seek broad, liquid exposures and adaptive, multi-style portfolios that harness diverse signals and instruments to improve resilience and consistency. The common features and practices across SMS managers rooted in this shared philosophy are outlined in the next section.

What defines an SMS fund?

SMS programmes are absolute return vehicles trading a highly liquid market set that spans multiple instruments, asset classes, and regions. They typically cover developed and emerging market financials – including equity, fixed income, and currencies –commodities, and credit. Futures contracts and FX forwards tend to be the primary instruments, complemented by cash equities, options and swaps, amongst others, and nearly all instruments traded are centrally cleared, minimising counterparty risk.

Diversification across alpha strategies is fundamental to SMS, with portfolios including a balanced mix of synergistic investment styles. These may include reversion, volatility trading, multi-asset carry, short-term trading, trend following, fundamental, and various macro styles. Trades are expressed through a combination of relative value (RV) and directional implementations. Portfolios are managed with minimal discretionary input using a rigorous research protocol to develop, validate, and maintain investment models. Strategies may take long or short positions, seeking returns in both rising and falling markets, and performance tends to have little long-term correlation to traditional assets or many types of alternative investments.

What distinguishes a systematic multi-strategy from a traditional multi-strategy hedge fund?

Systematic multi-strategy and traditional multi-strategy hedge funds share the use of quantitative signals, but they differ in discretion, allocation, liquidity, and performance profiles. Traditional multi-strategy funds frequently incorporate discretionary decision-making – especially in macro, equity long-short, and event-driven strategies – where portfolio managers size and select exposures based on views and perceived opportunity. This can cause large, cycle-driven shifts in composition (e.g. distressed assets waxing and waning). In contrast, SMS allocates and measures risk predominantly via systematic processes. While ‘conviction’ influences sizing, it is quantified and bounded, allowing risk to vary within defined ranges.

“Liquidity is a central differentiator: SMS programmes prioritise highly-liquid instruments and avoid assets such as convertible bonds or real estate, enabling more frequent investor liquidity (often weekly or daily).”

Liquidity is a central differentiator: SMS programmes prioritise highly-liquid instruments and avoid assets such as convertible bonds or real estate, enabling more frequent investor liquidity (often weekly or daily). Traditional multi-strategy funds can hold less liquid positions and may impose longer lock-ups.

Traditional multi-strategy funds typically embed broader diversity across instruments and styles, often resulting in lower volatility. However, they are generally more correlated to global equities, aiming to outperform in upward markets and draw down less in downward markets on a risk-adjusted basis. SMS strategies, by design, have historically exhibited low or near-zero equity correlation.

Portfolio utility for institutional investors

With a pure absolute return mandate, diversified alpha strategies, liquid market coverage, and minimal correlation to traditional assets, SMS offers strong potential utility for institutional investors. The ability to take both long and short positions across multiple asset classes and instruments, coupled with rigorous, systematic research and limited discretionary input, positions SMS to seek returns in varying market conditions while reducing reliance on traditional risk premia. Over the last few years, SMS funds have delivered strong and uncorrelated returns in both upward and downward markets. These attributes can enhance portfolio resilience and diversification for institutions seeking differentiated return streams.