October 22, 2024
rcm-alternatives
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With the NFL’s football season in full swing after a bevy of $100 million plus signings of All Star quarterbacks, and the NBA season right around the corner, where the conventional wisdom seems to be you need at least two, and ideally three All Stars to win a championship – the question of whether paying up for top talent, or going Moneyball style and building a team of complementary players, has never been more in focus.
Why are we talking basketball and the quarterbacks, because this same talent vs team question has long been a thorn in the side of investors building portfolios of CTAs and hedge fund managers. Do you go with the harder to access (maybe higher fees or higher minimum investments) star talent? Or include the lesser known funds (maybe emerging managers).
With all this backstory, a recent piece by Resonanz Capital, “The Myth of Talent in Multi-PM Platforms: Unraveling the True Drivers of Alpha Generation” sure caught our attention at RCM Alternatives, where we’re building multi-CTA and multi-hedge fund portfolios for our clients day in and day out.
The article challenges the conventional wisdom surrounding Multi-PM (Multi-Portfolio Manager) hedge fund platforms, which have gained popularity for their impressive risk-adjusted performance, suggesting that the impact of individual talent on overall performance may be less significant than previously thought. Said another way, they found the team of role players can be better than trying to sign the star players.
The research simulated a typical Multi-PM platform using data from over 10,000 hedge funds between 2012 and 2022. Surprisingly, the study found that excluding top-performing PMs had only a marginal effect on the platform’s overall performance. Even when considering only the bottom half of all PMs, the simulated platform still significantly outperformed the average hedge fund.
These findings indicate that other factors in the Multi-PM investment process, such as nimble capital allocation, extensive diversification, or stringent risk management, may be more crucial in driving alpha generation. Porting this research over to portfolios of alternative investments, it suggests that perhaps investors should consider a broader range of factors when assessing funds to include in their portfolios.
Jason Buck of Mutiny Funds, who run their own version of a Multi-PM platform (check it out here), allocating to more than 20 sub-advisors, summed it up saying “I’d much rather have the problem of over-diversification and trailing a superstar’s return over any one period, than the idiosyncratic risk of the superstar doing the investing equivalent of blowing out a knee. We call them ensembles, but to us the point is there can be safety in numbers” Want to run some of your own research along these lines. Maybe see if you can create a portfolio that outperforms this year’s superstar Mulvaney, check out the portfolio tool inside the RCM Alts database (you can register for free here).
PS – here’s an oldie but goodie from the podcast archives with the head of a multi-PM platform: https://www.rcmalternatives.com/2021/11/a-multi-pm-global-macro-masterclass-with-markian-zyga/
Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
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Limitations on RCM Quintile + Star Rankings
The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.
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