The Rise of Multi-Manager Hedge Funds

As we dive into 2025, industry chatter about hedge funds centers on the segment’s continued growth in a higher rates environment, investor concerns about performance, fees, outflows, and the continued battle for talent. New fund launches decreased to a record low, although the total number of hedge funds in the market ticked up, led by niche and multi-strategy funds. HFR reported growth of almost 10% year-over-year, with hedge funds reaching $4.51 trillion AUM in 2024.¹ Diversification and sound risk management remain a key concern as rates stay high and a raft of uncertainties continue to float in, including a new US administration, potential trade wars, and actual wars.

Multi-strategy hedge funds rose as the go-to structure starting in 2017. Now, the popular decentralized multi-manager platforms have performed well in recent years and the industry anticipates further growth. While equity and macro investing continue to rule the day, HFR’s new Multi-Manager/Pod Shop Index added 6.8% for the year 2024. Many marquee firms are integrating multi-manager style platforms within their broader hedge fund offerings. The largest multi-strategy hedge funds had (as of mid-2024) deployed at least $20 billion to more than 50 third-party managers.²

While investors continue to shift to multi-manager platforms for better risk-adjusted returns and growth opportunities, there is an increase of complexity across the structure of business model, data management, and technological stack. Here are some critical factors for hedge funds, asset managers, and other firms to consider when moving to or investing in a multi-manager platform model in 2025.

The technology opportunity to build better

If you’re launching a brand-new multi-strategy or multi-manager fund, in many ways you will have an easier road to implementing the best advanced operational and data infrastructure. A new fund manager or allocator can build or buy the finest possible technology platform that fits their chosen strategy, without the challenge of integration with older and existing systems.

In most cases, when a portfolio manager spins out from a larger fund, they need to independently build out their own front-, middle-, and back-office infrastructure. We often see new portfolio managers try and mirror the infrastructure from their previous shops. However, they are better served by exploring options for a more current infrastructure that will serve their specific needs and allow for scale. No matter their hedge fund strategy, new managers’ approach to modernizing (or not) their data systems will play a prominent role in their ability to both differentiate and excel.

The technology edge: building a scalable & adaptive fund

Aside from the operational efficiencies and investment lifecycle automation that investment managers should insist upon, perhaps the single most important value proposition in leveraging best-in-class technology is that it provides a solid framework supports agility today and enables growth tomorrow. A flexible data framework will open the door to advanced data science initiatives, enabling more sophisticated analyses, and insights that will future proof a fund for an unpredictable immediate future. Funds seeking to propel gen AI use cases in 2025 (hint: all of them), will find that superior data management and governance becomes that much more urgent.

Build or buy? Rip and replace? Patch and pray?

For existing funds transitioning to or adding a multi-manager strategy, existing systems will face an onslaught of new requirements and a potential technology infrastructure problem that calls for their systems to learn entirely new languages. Hedge fund operations depend on the continuous flow of data between systems, third-party entities, and the operational platform — which requires smooth integration of various systems. Without a unified golden source of truth connecting all aspects of investment lifecycles and providing the right on-demand insights, hedge funds risk becoming buried under disparate datasets and data redundancies and jeopardizing their success with new multi-manager strategies.

More impactful decision-making for optimal capital allocation

Investors are drawn to multi-manager strategies because they offer exposure to diverse segments, asset classes, and sectors. Multi-manager platforms have been yielding better returns than traditional fixed-income strategies in the past few years.³ Meanwhile, funds have been drawn to multi-manager platform strategies because they can enlist tighter risk controls, efficient capital allocation based on an individual portfolio manager’s performance, and faster expansion. Multi-manager platforms face new challenges that naturally come with added complexity and sophistication. The CIO must have the flexibility to look at the overall portfolio and also drill down to manager-by-manager data, a necessity from a capital flow perspective. 

Multi-manager funds need dedicated solutions to shift their efforts from the day-to-day operational workflow to higher-value decision-making, by seeing the overall mosaic of what is going on within their funds. Only then can they correctly allocate to track performance and management fees for optimized fund performance, accurate investor reporting, and maximized revenue. In a multi-manager structure, each portfolio manager is incentivized to perform well, based on the performance of their portfolio via performance and management fees. Incorrectly tracking allocations or the actual performance of individual managers opens the possibility of inaccurate accruals or payments.  

To gain margin and capital deployment efficiencies with the diversification of managers and strategies, portfolio managers and CIOs need to document precisely from where those efficiencies are coming. If you're running a skillfully diversified overall portfolio but are unable to accurately gauge and track performance and allocations across the different portfolio managers, you lose that competitive edge. Newly minted multi-strategy and multi-manager funds alike should deploy treasury management tools that furnish a centralized, accurate house view into the fund’s liquidity, cash flow, and fully loaded P&Ls of each portfolio manager, ensuring optimal allocations to the best-performing strategies.

Capital efficiency: the key to multi-manager success

Poor allocations hold up cash, which have financing impacts, margin impacts, and overall exposure impacts. For example, in a multi-manager fund with 10 unique portfolio managers each trading different strategies, the fund benefits from margin diversification with counterparties. As an example, a sector-focused fund may be subject to portfolio concentration risk. However, as part of a diversified portfolio, that requirement is likely to drop. This allows the fund to extend capital to other managers or increase cash reserves. Leadership must have the capability to break down manager-level exposures and manager-level risk and view them from a top-level perspective. 

Scaling power

To execute capital efficiently, a fund must have the data. As fund complexity expands, the tools required to scale need to go beyond spreadsheets and emails. Investor sophistication and expectations have increased drastically, and there is a focus on both the technology and talent of the non-investment teams. 

Multi-manager platforms are compelling for their scalability. As assets increase, there should be technological efficiencies to seamlessly allow for growth. Purpose-built technology must be as scalable as the front-office’s ambitions. In the digitally transformed financial system, rigorous data management and processing capabilities and advanced analytics are essential to enable firms to truly grow into world-class organizations.

See our earlier article where we walk through the key components of a modernized, cloud-based data platform and how to create a powerhouse of financial management and analysis.

Overcoming data and infrastructure challenges in multi-manager funds

A recent Bank of America global survey revealed that 73 percent of investors planning to redeem hedge fund holdings cited underperformance as their main concern.⁴ The investment management field is intensely competitive, with funds incentivizing every stakeholder. Approximately 60% of investors reported successfully securing fee discounts, compared to roughly half in the previous year.

Data management and infrastructure are impactful avenues to scale and differentiate your business from other managers. Innovative multi-manager platforms need real-time visibility into every agreement and entity and investment reference data type. Many funds are operating on patchwork solutions that comprise 20 different systems in use for 10-plus years.

Transformation is not easy, and ROI is not immediate.

Entity and investment structures are becoming more complex, compounding headaches in recordkeeping, accounting, and reporting. Today’s advanced, more holistic investment management offerings are tailor made for capital market structures unrecognizable from 15 years ago; and are the essential difference-maker so hedge funds can automate and simplify and thrive in complexity.