Fund of hedge fund managers with concentrated portfolios have tended to outperform their diversified peers," according to a Standard & Poor's (S&P) report.
S&P fund analyst Simon Scott said funds with 15 to 20 underlying managers performed better than funds that had a more diversified number of underlying managers.
In a year of strong performance, however, Scott said investors should
focus on hedge fund strategies that are run by managers with a definable strategy.
"Low market volatility and tight credit spreads have made it even harder to differentiate managers with true skill from those that have had some luck," said Scott.
In its sector report on alternative strategies, S&P reviewed both single and multi strategy funds.
The report assessed 15 managers and 30 products with two managers taking out the highest rating of five stars.
The managers were Gottex (Select) and Basis Capital.
"These managers displayed a consistent competitive advantage over their peers," noted the report.
The report also highlighted that retail appetite for both fund of hedge funds and single-strategy funds will continue, however, for single strategy hedge funds this will not be at the same pace.
"This is largely due to the complexities of some investment strategies and investors' difficulty in understanding these processes.
"For this reason, immediate future growth in this space is likely to come from long/short equity strategies and various global macro strategies," said the report.
