The five buckets classify what a manager does. Two common vehicles instead classify how capital is organised across managers, and both change the fee and liquidity terms enough that a learner who knows the five buckets and not these two will misread a term sheet.
A multi-strategy fund runs several of the five buckets inside one legal entity, allocating internal capital across semi-autonomous teams, usually called pods. Each pod trades its own mandate under a risk limit set centrally, and the centre reallocates capital toward what is working and cuts what breaches. The investor gets diversification across strategies without having to time the rotation, and the platform gets a stable business, because a bad year in one pod does not close the firm.
How do pass-through fees and netting risk work?
The fee term that follows is the one to understand, and it is called pass-through. Many multi-strategy platforms charge, instead of a fixed management fee, the fund's actual operating costs, including pod compensation, and pod compensation is usually a percentage of that pod's own profit and loss. Take five equal-sized pods returning +30%, +30%, +30%, −20% and −20% on their own capital. The fund's gross return is 10.00%. Paying each winning pod 20% of its own gains costs 3.600% of fund capital, while 20% charged on the fund's netted 10.00% would cost 2.000%. The gap, 1.600 percentage points of capital, is netting risk, and somebody bears it. Under a pass-through structure the investor bears it and nets 6.400%; under a netted fee the platform bears it and the investor nets 8.000%. Ask which one the document you are reading actually says, because the headline "we only charge our costs" hides the answer.
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How does a fund of funds double the fees?
A fund of funds allocates to external managers instead of internal pods, and it adds a second, fully separate fee layer. Take a 14.00% gross return at an underlying manager charging 2 and 20. The underlying fund takes 2.000 points of management fee and 2.400 of performance fee, passing 9.600% up. A fund of funds charging 1 and 10 then charges its own layers on the 9.600% it actually received, not on the original gross, taking 1.000 and 0.860 to leave the investor 7.740%. The total fee load is 6.260 points of a 14.00% gross return, or 44.71% of it, and the second layer alone cost 1.860 points. CL-AL.1 runs this arithmetic in full against a fund-of-one alternative and prices the difference at 2.885 points.
What does the second fee layer buy?
What the second layer buys is manager selection, access to closed funds, operational due diligence and monitoring, and a smaller minimum ticket. Whether that is worth 1.86 points a year is an empirical question about the selector's skill, not a matter of principle, and AL1.04 is where that question is asked properly. The structural cost is easier to state. Two layers of gates and lock-ups compound, so a fund of funds is less liquid than the least liquid manager it holds. And the netting problem reappears in a different form, because the fund of funds pays performance fees to its winning managers while its losing managers pay nothing back.