The Absolute Return: Multi-Strategy Hedge Funds
The Absolute Return: Multi-Strategy Hedge Funds
Making money when the S&P 500 crashes. How “Pod Shops” like Citadel and Millennium generate consistent returns by eliminating market risk.
Executive Summary
- Market Neutrality: Unlike a mutual fund that buys stocks and prays the market goes up, Multi-Strategy funds hold both Long (Buy) and Short (Sell) positions simultaneously. The goal is to strip out “Beta” (Market Risk) so the fund makes money regardless of direction.
- The “Pod” Structure: These firms employ hundreds of independent trading teams (“Pods”). One team trades Energy, another trades Rates, another trades Merger Arb. If one team fails, they are cut; the diversified structure ensures the ship never sinks.
- Sharpe Ratio Kings: The goal is not the highest return, but the highest Risk-Adjusted Return (Sharpe Ratio). They aim for a smooth equity curve with minimal drawdowns, acting as the “ballast” in a volatile portfolio.
The Pass-Through Fee
Warning: Top-tier Multi-Strats do not charge the standard “2 & 20.” They use a “Pass-Through” expense model. You pay for their rent, technology, and massive trader bonuses. Fees can exceed 5-7%, but UHNW investors pay it because the Net Return is still superior and uncorrelated.
Mechanic: Extracting Pure Alpha
Long $100
Betting on Winners
Short $100
Betting vs Losers
Net $0
Market Exposure
Leverage
Amplifying Spread
Simulation: 2022 Bear Market (Tech Crash Scenario)
Performance during S&P 500 Drop (-19%)
| Feature | Mutual Fund (Long Only) | Multi-Strategy Hedge Fund |
|---|---|---|
| Direction | Makes money only when up | Makes money in any direction |
| Correlation | 1.0 (Moves with Market) | 0.1 – 0.2 (Uncorrelated) |
| Liquidity | Daily | Quarterly or Annual (Gates) |
“Alpha is zero-sum. For you to win, someone else must lose. Multi-Strategy funds are the industrial-scale machines designed to be on the winning side of every trade.”
Essential Resources
INTERNAL
BMT Playbooks