Insights into trends and innovations in multi-strategy alternative funds

Product innovation in MSA funds has been highly active recently, with many new funds coming to market and new managers entering the space. This report will take a closer look at the growth of MSA funds and will examine trends in product development, investor demand, and advisory structure.

Some highlights from the report:

The broad SI-identified universe of multi-strategy alternative funds had total AUM of US$51 billion as of February 2016. Assets have increased from US$22 billion in December 2012, and the number of products nearly doubled during that time. Inflows totaled US$10 billion in 2015, following net deposits of US$7 billion in 2014 and US$9 billion in 2013.

The MSA space has been drawing increasing interest from a wide spectrum of asset managers. Several larger fund firms recently launched their first MSA fund, including Prudential, Vanguard, and MainStay.

As the MSA universe grows and matures, many newly incepted funds have sought to differentiate their investment styles and goals. Several notable themes have emerged. Many funds emphasize capital preservation, and most have some aspect of downside protection incorporated into their objective.

Some MSA funds seek outperformance against a specific benchmark. Others highlight the benefits of diversification and the low correlation between different asset classes. Several MSA funds have an income orientation, and use yield focused mandates.

Since their investment styles are often complex and multifaceted, MSA funds have wide variation in the types of advisory structures they use. Some are advised internally while others use one or multiple sub-advisers.

Many MSA funds are also structured as funds-of-funds. In what may be indicative of a broader shift, recently several managers launching their second MSA product have opted to use outside sub-advisers. As MSA funds continue to rise in prominence and more information informs the debate, the merits of different product structures will be a key consideration for asset managers going forward.