Funds of Hedge Funds’ Last Stand?
The fund of hedge funds market has long been a manually intensive one. New regulations and strategies—and a general desire to survive—have led to a push for automation throughout the industry.
If you listen to some, the fund of hedge funds (FoHFs) industry is dying; still others say it is simply evolving. This segment of the market has seen its total assets managed fall 20 percent to less than $640 billion since 2007, according to Hedge Fund Research.
Starting with the crisis of 2008 and extending to the Bernie Madoff ponzi scheme scandal, funds of hedge funds have had a tough go of bringing institutional investors back into the fold. The operations surrounding the industry are heavily manual. They’ve been labeled as beta generators. There’s significant overhead and fees involved. There’s a lack of transparency and control.
“Since the crisis, funds of funds have been under duress. They were the ATM because they were more liquid so assets were reduced significantly, particularly in Europe and in Asia after the collapse,” says Orla Nallen, managing director of US alternative investment services at BNY Mellon. “Looking at that and the future, funds of funds had to evolve and realign themselves.”
That’s the bad news, and it’s substantial to say the least. But not everyone’s given up on this segment just yet. There are those who see an opportunity in the fund of hedge funds market, and others who say that the regulatory environments in Europe and the US will only help to improve the marketplace, and thus attract new investors.
Northern Trust is one such firm that sees dollar signs. An administrator with more than $180 billion under administration, Northern Trust acquired Citadel’s administration business Omnium last year. The bank has also invested significantly into its fund of hedge funds solution, Hedge Fund Monitor.
Ian Headon (pictured), Northern Trust’s asset servicing product manager for alternative investments, says the bank views this as a growing space and a market ripe for opportunity. He says Northern Trust wouldn’t have made that investment, as well as constant upgrades to its FoHFs solution, if it didn’t believe the market is coming back.
“We’re absolutely committed to this space, and we see it growing,” he says. “We think that as the funds of hedge funds become more automated and are able to bring more transparency into their hedge fund investments, deploying that new capability will create interesting opportunities.”