Blackstone on hedge funds: Why multi-strats are back

Asset managers, brokers & exchanges

• Joe Dowling · Blackstone

  Multi-strat funds are the answer to stock-bond correlation, which has risen and is high over fifty years

  Stock-bond correlation has averaged 62% over fifty years and has risen since 2022. Combined with a volatile world of de-globalization that creates winners and losers, this makes conditions ideal for multi-strategy funds. Allocators want returns uncorrelated to stocks and bonds, which Dowling argues multi-strats deliver. He frames this as the core reason for demand, challenging the traditional 60/40 portfolio.

  “stocks and bonds are correlated a lot more than investors think. If you look back over fifty years, it's 62%, and that has risen since 2022.”at 2:14

• Riad Abrahams · Blackstone

  Hedge funds are the top allocator asset class; multi-strat demand is growing far faster than the industry

  Hedge funds have been the most sought-after asset class for allocators for a second straight year. Multi-strats are in particularly high demand. Over five years, hedge fund AUM has grown about 16% a year against about 4% for the rest of the industry. Institutions are gravitating to multi-strats as the answer to the shift in stock-bond correlation regime.

  “it's actually the second year in a row that hedge funds are the most sought after asset class. And within that, multi strats are obviously in huge demand.”at 3:24

• Joe Dowling · Blackstone

  Investors are underweight multi-strats; top firms' uncorrelated double-digit returns with high Sharpe should draw more allocation

  Some Ivy League endowments now hold about 20% in the asset class, mostly as a fixed income substitute. Yet overall allocations to multi-strats are low, and Dowling thinks investors have reasons to dislike them. He argues the top firms have delivered uncorrelated double-digit returns with a high Sharpe ratio year after year, which he calls nirvana for investors. He concludes allocators are underweight the asset class.

  “I definitely think people in general are underweight the asset class. You can see some of the Ivy League endowments are actually now at 20% in their portfolios across the board.”at 4:10

• Riad Abrahams · Blackstone

  Multi-strats deliver equity-like returns with a fraction of the risk; they should be a core portfolio holding

  The longest multi-strat index, the Pivotal Path Multi Strategy Index, goes back almost thirty years. Over that period it returned about 9% with under 5% volatility. Equities returned 8% with 15% volatility and bonds returned 3% with 6% volatility. Multi-strats therefore deliver equity-like returns with a fraction of the risk, so Abrahams argues they should be a core holding in any institutional or individual portfolio. He notes the most sophisticated pensions, sovereign wealth funds and endowments allocate around 20% to absolute return.

  “And so if you think about multi strats, over that period, they've delivered 9% returns with less than 5% volatility.”at 4:50

• Joe Dowling · Blackstone

  Top multi-strat firms have built a formidable moat in recruiting, technology and leverage, so new entrants usually fail

  Dowling argues people underestimate the moat the top players have built. The moat rests on their recruiting, which he calls a big recruiting business, their information technology, and their policies on using the centre book and leverage. He says many sophisticated people have tried to enter the industry to start a firm and failed. The barrier to entry is therefore very high.

  “people underestimate how big a moat the top players have created in not only their recruiting... in their information technology... in their policies around using the center book, using leverage, it is formidable.”at 7:18

• Riad Abrahams · Blackstone

  A centralised team stacking uncorrelated alphas, with less leverage and lower costs, beats the many-pod model

  Abrahams says the prevailing model has high fees, high leverage and constrained investor liquidity. He proposes an alternative: a centralised team that deploys capital across multiple internal strategies. This would stack structurally uncorrelated alphas across asset classes and rely less on leverage for risk control. Shared data and technology infrastructure would cut operating expense and compensation burdens, passing scale savings to investors. Large, institutionalised firms could also balance liquidity with business risk better.

  “an alternative approach would be one that uses a centralized team that deploys capital across multiple internal strategies as opposed to many teams effectively running the same strategy.”at 9:46

• Joe Dowling · Blackstone

  Limited capacity gives multi-strats pricing power, so high fees are justified by their record

  Multi-strat capacity is limited, and limited capacity gives managers pricing power. Demand is exceptional: every time a fund opens, it can immediately raise tens of billions of dollars. Dowling says the firms have earned this because they have outperformed. He argues investors should focus on net return and consistency, not fees.

  “these are limited capacity strategies. And whenever something is limited, you have pricing power.”at 12:23

• Riad Abrahams · Blackstone

  Top multi-strat funds' high fees are justified by their performance, but fees still burden net returns

  Abrahams says the best-performing funds generally have the highest fees, so investors should not be uncomfortable with high fees. High fees still create a heavy burden on net returns. Some platforms that adopted pass-through fee structures, though not the top ones, have compromised the investor's net experience because investors face a large hole to climb out of. He says alignment between manager and investor is what he values.

  “the fees are high, but the best performers deserve those fees... but high fees do create a high burden when you look at those net returns.”at 12:56

• Riad Abrahams · Blackstone

  Multi-strats are broadening into external allocations, SMAs and new asset classes like commodities and private credit

  Two areas of innovation stand out. First, external allocations have grown: the share of multi-strats doing some external allocation rose from 50% over the last three years to 75%. External SMAs have grown from 25% to nearly 40%. Second, multi-strats are expanding into commodities and some into private credit. Abrahams says this makes them more like multi-strategy platforms than multi-PM shops, and he applauds it.

  “you see more external allocations. And so if you looked back in 2022, just over the last three years, 50% of multi strats were doing some form of external allocation. That has grown to 75%.”at 13:32

• Joe Dowling · Blackstone

  Investors underestimate innovation at multi-strat firms, especially in centre-book use and AI

  Dowling says investors underestimate how much innovation is happening at multi-strat firms. He points to the centre book, the use of AI, and isolating super alpha performers and amplifying them in portfolio construction. He gives no quantitative evidence, but the argument is that this innovation is a source of their edge.

  “I think investors underestimate the amount of innovation that's happening at these firms, especially around the center book, the use of AI”at 14:50

• Riad Abrahams · Blackstone

  Pass-through fees leave LPs keeping only about 40 cents per dollar, a heavy burden on net returns

  Under the prevailing model, a platform runs 100 to 200 teams that mostly run similar equity long-short strategies. Each pod earns a low return on assets, which leverage turns into a high return on equity. Under the old two-and-twenty model, LPs kept roughly 70 cents per dollar. Under pass-through, where underlying costs and PM compensation are charged to investors, LPs keep about 40 cents of every dollar, according to publications from several banks. Abrahams says this places an enormous burden on investors.

  “the LP on average is keeping about 40¢ of every dollar. So there is an enormous burden that investors now have to bear to access that traditional multi strategy model.”at 15:18

• Riad Abrahams · Blackstone

  Technology, risk management and AI will separate winning multi-strat platforms, as scale makes differentiation harder

  Abrahams says technology, risk management and AI will distinguish successful platforms. Large footprints make it harder to do something different from others, because these firms are in some ways becoming the market in hedge fund trading. Those that keep evolving how they deploy capital, which strategies they invest in, and how they use data and leverage AI will separate further from the pack.

  “I think technology and risk management and AI. I think one of the challenges with their success and their very large footprints today is it becomes naturally harder to make sure you're doing something differently”at 17:06

• Joe Dowling · Blackstone

  Multi-strats will move into semi-liquid and less liquid strategies as lockups lengthen and capacity stays limited

  Strong demand combined with limited capacity has let multi-strat firms lengthen lockups on their capital. Dowling says the logical next step is to move away from purely liquid strategies into a large addressable market of semi-liquid and less liquid strategies. He expects this to be the direction multi-strats take as they move forward. He argues their risk management and technology will let them win in these sectors and capture a lot of alpha.

  “what they've been able to do is lengthen up the lockups around that capital. So the logical thing for me, for them to do, is to start expanding away from purely liquid strategies”at 17:47