Funds of Hedge Funds: Market Realities
Funds of hedge funds are at an important crossroads in the current market. In 2009, more than 70 percent of investors interested in funds of hedge funds mentioned an interest in multi-strategy-focused funds. While some investors remain interested in single-strategy-focused funds, with long/short equity, distressed credit, and CTA/managed futures all being strategies mentioned by investors, demand has focused on funds that can provide investors with access to a group of managers that diversify using many different strategies. With investor interest focusing on multi-strategy offerings, funds and investors alike are looking to further qualify and quantify the value that specific funds offer in the current market environment. While some funds of funds can easily determine their value due to a focus on a specific type of underlying manager, or expertise in a specific geographical region, other funds of funds need to be creative when branding themselves. One domestic wealth advisory firm specifically wanted funds of funds that had outperformed those in their peer group; it thought that funds of funds that outperformed their peers during the second half of 2008 were likely to outpace their peers going forward. This specific investor search serves as a reminder that relative performance remains key for funds.
Liquidity also remains a key issue among interested investors. In 2009, out of the 80 or so investors with an interest in funds of funds that BHA analysts have interviewed, 56 have had specific requirements with regards to the liquidity offerings of potential funds of funds. Approximately 53 of the 56, or 95 percent, have been interested only in funds offering quarterly liquidity or better. Investors across the spectrum require favorable liquidity terms in response to the lack of liquidity they faced in years past. One Swiss wealth advisor in particular that was only now resuming the process of evaluating potential funds of funds, required that it be offered monthly or better liquidity. Funds of funds managers need to be cognizant of what potential investors are currently seeking; according to BHA data, investors are overwhelmingly telling our analysts that favorable liquidity terms are crucial in the current market environment.
While investor interest remains steady for diverse, liquid, multi-strategy offerings, the job of differentiating a fund of funds from its peers lies in the hands of marketers. Funds need to spend these crucial months building their pipelines, identifying interested investors, and pitching prospects on the uniqueness and superiority of their products. The capability of a fund of funds to effectively brand itself as a unique product with a specific niche may be the key to securing new allocations.