Fund-of-hedge-fund (FOHF) and multi-strategy managers are tailoring their products to provide investors with improved protection in negative markets, according to Standard & Poor's Fund Services (S&P).
According to S&P's report on the alternative strategies/multi-asset peer group, investor demand is "inextricably tied to the performance and flight-to-liquidity issues that arose in a difficult 2011".
Managers are continuing to make changes to their underlying holdings to provide liquidity and deliver more alternative returns, according to the report.
S&P fund analyst Jason Patton noted that all asset classes are currently struggling to lure investors away from cash.
"We expect developments in Europe will dictate overall appetite for investment products other than defensive ones in the current environment," he said.
The S&P report found managers of 'classic' FOHFs are under pressure to demonstrate their high fees are warranted.
"The inclusion of exchange-traded funds and alternative beta replicators in some newer multi-strategy portfolios is compressing average fee levels in the sector," said the report.
The report also found that managed futures and "long volatility" profile strategies are winning higher allocations within FOHFs.
There is also an increasing distinction between products with high equity beta characteristics and those showing a more "alternative" return profile with limited equity beta exposure.
