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/