In Recovery: Funds of Hedge Funds

by Graeme Terry

  • 13 Feb 2012
  • HF

Preqin’s Hedge Fund Investor Profiles database currently contains profiles for 596 active fund of hedge funds managers. Of these managers 48% are based in North America, 41% are based in Europe and 11% are based in Asia and Rest of World.

Despite the continuing global financial market instability, the overall picture remains relatively healthy for the fund of hedge funds industry and total assets have grown over the past 12 months to now stand at approximately $945 billion. The proportion of managers with less than $250 million in AUM has continued to grow but it is the largest managers which control capital in the industry. Only 5% of managers have more than $10 billion in AUM but in terms of assets these managers represent 45% of capital in the industry. This shows that a large proportion of assets in the industry are controlled by a relatively small number of managers and these larger managers can be vital due to the large number of vehicles they invest in and their large ticket sizes.

2011 was a year of mixed fortunes for funds of hedge funds with 24% reporting an increase in assets under management and 25% reporting a decrease. Mid-sized managers (those with an AUM of $1-5 billion as of Q1 2011) were most successful in attracting investor mandates over the course of the year with an average growth of 10%. The largest managers (AUM of more than $10 billion as of Q1 2011) were least successful, suffering an average decrease of 2.1% over the past 12 months. The average AUM of a fund of hedge funds manager has continued to decrease, although at a much smaller rate than the previous year, having fallen from $2.18 billion in 2011 to $2.09 billion in 2012.

Institutional investment in hedge funds is predicted to increase over the course of 2012 meaning there is the potential for funds of hedge funds to attract further investment. Investors now have greater demands in terms of transparency, flexibility and fee structures and funds of funds will have to react to these changing investor demands in order to attract capital ahead of single manager funds. This is likely to lead to fund of hedge funds managers launching niche strategies and innovative products in an attempt to remain relevant to investors. Fund of funds structures remain popular with smaller investors and investors making their first investment in the asset class.

Overall 2011 has been a challenging year for the hedge fund industry leading to mixed fortunes for funds of hedge funds. There has been evidence of a slight recovery in the popularity of funds of hedge funds in 2011 and these managers need to continue to react to changing investor demands if they are to remain successful in 2012. The next generation of fund of funds will need to accommodate the needs of the ever-evolving hedge fund investor group, and managers that react to this are most likely to be successful in increasing their AUM.  Providing managers are pragmatic and react to these demands, there is the potential for the funds of hedge funds industry to grow and send the AUM back towards the $1 trillion mark.


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