Fund of hedge funds asset growth half that of hedge funds, says S&P

Funds of hedge funds still have a role to play for investors, despite assets in hedge funds growing over twice as fast as in multi-manager products in the year to March, according to Standard & Poor’s.

Randal Goldsmith, fund analyst at the ratings agency, attributed the divergence in growth to institutional allocators investing directly, instead of using funds of funds.

This leaves hedge funds with $2.6trn, 15% below their pre-crisis asset peak, according to database (HFN), while funds of funds languish 40% below theirs.

S&P dubs the general picture on fund of funds assets “disappointing when viewed against a much more robust recovery in funds under management at the underlying hedge fund level”.

Major funds of funds being invested in fraudsters like Bernard Madoff tarnished the industry and inflows have slowed since the crisis.

Additionally, funds of funds returns have not beaten the average hedge fund’s return since 2007, according to Hedge Fund Research.

S&P says: “We have watched the number of rateable funds of hedge funds decline significantly, raising the question of whether the model is flawed. We still think that the model has a role for investors. At its most basic, the model is all about diversification by strategy and by manager, as well as by security, sector, geography and so on.”

Nevertheless, many institutional investors are moving to pick funds themselves.

“With relatively stable and secure cashflows they may be better placed than a fund of funds manager to deal with the liquidity terms of hedge funds. However, the diversification benefits would seem to be of value to smaller institutions and private individuals.”

While relatively high minimum investment thresholds at many funds of hedge funds discouraged smaller investors, other multi-managers like HDF under new CEO Pierre Lenders cut minimum investments from €100m to around €30m.

“The launch of Ucits-compliant funds of funds should also be a way of getting more interest from smaller institutions and private individuals, given typically smaller minimum dealing sizes,” S&P added.

“Against the background of a weak recovery in funds under management we have seen some team rationalisations at groups such as GAM and HDF, which have made savings in their investment teams.

“In contrast, risk management capabilities have been maintained and in some cases enhanced,” Goldsmith said.

Notz Stucki, for example, appointed two experienced operational risk managers last year.

Clearview appointed two new investment professionals to reinforce the operational due diligence and IT systems they apply to the Argenta Offshore Fund, S&P’s Goldsmith said.

David Walker

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