Since the onset of the financial crisis in 2008, fundraising has proven to be a challenge for many firms in the wider hedge fund community and fund of hedge funds managers are no exception. The ensuing economic instability has been a major contributing factor to the difficulties in fundraising over the past five years, yet there is evidence to suggest that fund of hedge funds managers have provided sufficient stability for their investors during this period and are well placed to maintain their strong presence in the hedge fund industry.
The most immediate impact of the financial crisis on the fund of hedge funds industry is reflected in the number of funds launched each year since 2009. According to data from Preqin’s Hedge Fund Analyst, an average of 130 funds were incepted annually by fund of hedge funds managers between 2009 and 2013 which compares unfavourably to the average of 177 funds launched each year over the previous five years (2004 to 2008). Since a peak of 203 fund launches was reached back in 2007, the number of launches has fallen steadily each year except for in 2010 which marked a temporary resurgence in fundraising levels with 177 funds coming to market.
On a positive note, of the 652 fund of hedge funds vehicles launched worldwide between 2009 and 2013, approximately 88% of these vehicles remain active to this day. The majority of these active funds (57%) have been raised by North America-based managers, with Europe-based managers representing 31% of active funds of hedge funds launched between 2009 and 2013. Managers based in Asia-Pacific and Rest of World regions represent 7% and 5% respectively of the total number of active funds launched between 2009 and 2013.
Despite not raising the largest number of funds between 2009 and 2013, Europe-based fund of hedge funds managers have wound up the largest proportion of vehicles during this time with 59% of all liquidated funds originally incepted by these managers. In contrast, while the majority of funds launched since 2009 are North American products, this region accounts for only 24% of liquidated funds over the same time period. Fund of hedge funds managers within Europe have faced a number of challenges including the introduction of legislation such as AIFMD, financial uncertainty surrounding the Eurozone and a reduction of investor confidence in hedge funds within Europe in recent years. All of these factors have had an impact on the operations and strategies of a number of EU-based firms, causing these managers to shelve existing products.
Despite ongoing concerns over fundraising with some investors moving away from funds of hedge funds and into direct hedge fund investment, funds of hedge funds maintain a key role in the wider fundraising of hedge funds. An overwhelming majority (88%) of fund of hedge funds vehicles launched by 344 fund of hedge funds managers between 2009 and 2013 remain actively trading. This indicates the success of these managers in navigating the uncertain economic climate of the past five years and also highlights their resilience, something which they will need to draw on in order to successfully navigate forthcoming challenges.