Funds of hedge funds have recently suffered one of the most challenging periods of fundraising and asset-retaining. The Madoff scandal and relative poor performance in the industry caused investors to withdraw significant amounts of capital, and the number of fund of hedge fund managers has fallen consistently since 2008. However, Preqin’s research shows that funds of hedge funds’ aggregate assets under management, which declined significantly from 2008, now shows signs of recovery.
The fund of hedge funds industry’s aggregate assets under management was USD 1.25 trillion in 2008, but fell sharply to USD 948 billion in 2009. Total aggregate industry assets again decreased, albeit less dramatically, to USD 902 billion in 2010. However, the first quarter of 2011 has seen the industry grow in terms of aggregate AUM, and Preqin predicts the industry to reach USD 950 billion by the end of the year, with the upward trend set to continue into the longer term.
In order to survive the difficult period of redemptions, and to attract new investors, funds of hedge funds have had to adapt. One of the most significant changes in the industry has been greater transparency, with a number of firms, including London-based Sciens Capital Management, offering managed accounts on a greater scale. Boutique managers and niche strategies have also become more important in the industry, and Preqin has found that fund of hedge funds managers are increasingly seeking more niche strategies and looking towards emerging markets to generate returns.
After a difficult few years for funds of hedge funds, the managers that have appropriately adapted to retain investors from the institutional market have regained some lost confidence, and with numerous new funds expected to be launched this year, the aggregate industry AUM is heading towards USD 1 trillion once again.