Mandates for Funds of Hedge Funds Increase
During the past year, many in the hedge fund industry have voiced the opinion that funds of hedge funds are dead. They say this because many investors have been scared away from funds of funds. Liquidity concerns, transparency issues, and the general fee structure of these multi-manager vehicles have deterred investors. An analyst at a Canadian-based family office described the space of late as “barren,” but he still remained optimistic about the upside that seems to him inevitable. With total industry assets at $1.67 trillion—just 2 percent shy of the high-water mark—he believes investors will return.
That said, renewed interest in funds of funds isn’t going to happen without change. Many institutional investors that were previously nervous about allocating to funds of funds, are now taking matters into their own hands. According to an associate director at Fitch Ratings, “Institutional investors want to be more directly involved in hedge fund selection and FoHF managers are expected to act more as solution providers, via managed accounts or advising services.”1
Many managers have realized that such changes are necessary in order to overcome the concerns that caused the drop in investor interest. In addition, as investors take a more hands-on approach, it is widely expected that managers will be forced to lower fees. A number of managers are launching funds that are UCITS-III compliant to address liquidity and transparency concerns.
Looking at the BHA network for the past four months of the year, the research team has identified 233 investor mandates from investors interested in allocating to funds of hedge funds this year. That represents a significant increase from a year ago, when BHA collected only 175 mandates during the same time frame.
For many, the reason to invest in funds of funds is for the diversified exposure they offer. However, in addition to the changes mentioned previously, a large number of investors want to only invest in managed accounts. This is the requirement of a large university endowment located in the western U.S. After taking three-months to evaluate and restructure its portfolio, the directors of the endowment decided to allocate roughly $25 million to a large fund of hedge funds that offers managed accounts.
1 Hedgeweek, “Fund of hedge fund seen renewed inflows,” April 19, 2010