Fund of funds managers often claim that their ability to access to the most sought after fund managers and their expertise in overall fund selection makes them an excellent investment option, especially well suited to smaller institutional investors and those that are new to the asset class. For their key target market, skill and ability in these areas represent key reasons for accessing the market via the multi-manager route.
Preqin has performance data on more than 10,200 underlying fund investments made by fund of funds managers. In order to assess their skill in selecting the best funds, we have examined the placement of these underlying vehicles by quartile according to the relevant Preqin benchmarks. The sample is restricted to include only managers where we hold performance data for 10 or more of their underlying fund investments. This sample includes 6,339 fund investments made by 169 different fund of fund managers. When splitting these fund investments by quartile ranking, 55% of the investments were in the top or second quartiles indicating that fund of funds have enjoyed some success in selecting funds that exceed their respective benchmarks. In total, 18% of investments made by fund of funds managers appear in the bottom quartile, showing that this group has also had some success in avoiding the worst performing vehicles.
It is important to note that despite this success, the performance of funds of funds as investment vehicles has been somewhat disappointing, with fund of funds median performance lagging behind that of the overall market. It is interesting to note that despite spreading risk across many different vehicles, the distribution of returns is still relatively wide within the sector – a fact that reinforces the high level of skill involved in fund selection, which is a trait that must equally be shared by the LP when selecting a fund of funds manager itself.
More details on private equity fund of funds performance can be seen in the newly released 2011 Preqin Private Equity Fund of Funds Review.