Funds of funds have historically been a popular choice for small and medium-sized investors, but larger investors have also committed to such vehicles to enter unfamiliar markets or regions that they cannot, or are unwilling to, access through direct fund investments. 83% of investors in funds of funds have a total asset base of less than $10 billion. 42% have assets of between $1 billion and $9.9 billion, and 41% have less than $1 billion under management.
Some of the motivations for investing in funds of funds, such as accessing top tier funds and global diversification, are not as compelling or relevant in the current market as they have been in previous years. Investors are committing less capital to real estate funds, with some halting allocations altogether. Those that are willing to invest are favouring low-risk investments or targeting funds which they believe will provide the best returns in the current market rather than seeking global and strategic diversification.
Investor appetite for funds of funds has declined, as has the number of new investors making such commitments for the first time. Only a small number of those that have made previous investments and will be active in private real estate in 2011 are actually seeking fund of funds opportunities; the rest will invest in other fund types. Preqin has learned that the majority of institutions will keep funds of funds as a long-term preference, but a few have stated that they will no longer invest in such vehicles. This could be due to unsatisfactory returns of the funds of funds in their portfolio, or because they have now gained the necessary knowledge and experience to invest in funds directly. Those that have committed to funds of recent vintages are waiting to assess the performance of those investments; as firms are deploying capital at a much slower rate it may be a while before these investors are ready to make new fund of funds commitments.