Since the start of the decade, the fund of hedge funds industry has been shrinking. This trend started as far back as 2007 (as noted in Will the Demand for Change Trigger a Reinvention of the Fund of Hedge Funds Model?) and has continued in recent years. As shown in the chart below, the number of funds of hedge funds (FoHFs) launched annually has decreased dramatically since 2010, and shows no signs of stopping.
From 2010 to 2017, the number of FoHFs launched by North America- and Europe-based firms fell dramatically by 62% and 85% respectively. There was also a substantial decline (-73%) in European fund launches between 2016 and 2017, explained in part by the uncertainty brought on by Brexit negotiations. Fund managers in Europe may be adopting a ‘wait-and-see’ approach for the next couple of years, which is impacting fund launches in the short term.
One of the factors that could partially explain the decline of FoHF launches (and the increase in liquidations) is the continuing trend of consolidation within the industry. In 2008-2017 there were 58 M&A deals that involved over 100 FoHF managers; Preqin has previously analyzed this trend of industry consolidation in Preqin Special Report: Consolidation in the Fund of Hedge Funds Industry, which showed that larger firms are acquiring smaller managers and merging with other large firms to achieve economies of scale, thus providing more diverse solutions for clients. Consolidation also affects the number of funds launched annually as well as the overall number of firms in the industry: rather than multiple firms launching funds separately, a smaller number of firms are launching fewer funds.
Another influencing factor is the general industry trend of moving away from ‘off-the-shelf’ products and towards customized solutions, ranging from managed accounts to investment solutions provided by platforms. Switching from standardized products to solutions that are tailored to each investor means firms are launching fewer funds. Over time, investors have become more sophisticated and there is now less demand for products and more demand for the advice and expertise that FoHFs can provide. A 2017 Preqin survey of FoHF managers showed that on average there was an even split between assets under management and assets under advisement (56% vs 44% respectively), an indication of the importance of advisory services.
Among recent interest in cryptocurrencies, a new cluster of FoHFs has sprung up that invest exclusively in cryptocurrency hedge funds. Since the start of 2017, eight new cryptocurrency FoHFs have been launched, all of which are now tracked on Preqin’s online database, alongside 94 cryptocurrency hedge funds. However, this spike in the number of launches is unlikely to be a long-term trend, due to a lack of support for cryptocurrencies from institutional investors.
*The numbers of fund launches and liquidations in 2017 and 2018 are likely to increase as more data becomes available.