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Single-Strategy Funds of Hedge Funds – Which Strategies are Most Utilized? – May 2014

by Simon Dhadwal

  • 23 May 2014
  • HF

Preqin data indicates that the last several years have produced a higher proportion of fund of hedge funds vehicles launching with a single-strategy focus than ever before. This is borne out by the fact that approximately 50% of all active funds of hedge funds launched between 2009 and 2013 had a single-strategy focus, while 46% of all funds of hedge funds launched in the five years prior to that (between 2004 and 2008) employed one principal strategy. With that in mind, it is interesting to assess which single strategies are most commonly utilized by fund of hedge funds managers active today and which individual strategies they are most likely to favour looking ahead.

According to data taken from Preqin’s Hedge Fund Analyst online service, approximately 44% of all active fund of hedge funds vehicles are focused on a single top-level strategy i.e. one of event driven, long/short, macro, relative value and others. Historical data reveals that within this segment of single-strategy funds of hedge funds, just over half (51%) are focused on long/short funds. The next most common single investment approach to be utilized is macro which is a focus for 26% of active single-strategy funds of hedge funds. The remaining 23% of these funds are split between relative value (10%), event driven (8%) and others (5%), with the latter primarily consisting of niche and mortgage-backed strategies.

Furthermore, data based on single-strategy fund of hedge funds vehicles launched in 2013 shows that long/short remained the most common single-strategy for a multi-manager fund launch, with the strategy accounting for 39% of these launches. Macro-focused vehicles represented 33% of active single-strategy fund of hedge funds vehicles launched in 2013. Despite the underwhelming performance of macro funds in 2013, it appears that the strong liquidity characteristics appealed greatly to fund of hedge funds managers, many of whom maintain rigorous liquidity requirements following the Madoff scandal in 2008. Elsewhere in 2013, relative value funds accounted for around one in eight (12%) single-strategy fund of hedge funds launches, while other strategies (9%) and event driven funds (7%) were the least common investment approaches.

Although fund of hedge funds managers are synonymous with creating multi-strategy portfolios for their investors, the increasing proportion of single-strategy offerings being launched suggests that they are a significant part of efforts to revive interest in multi-manager products. Within these offerings, funds with a long/short mandate have historically proven to be the most commonly launched single-strategy by fund of hedge funds managers, and with good reason. The ability of these funds to deliver superior returns (funds of long/short funds were the best performing fund of hedge funds strategy category in 2013 – see Preqin 2014 Global Hedge Fund Report) as part of a multi-manager portfolio means that, looking ahead, they will likely remain the preferred strategy for fund of hedge funds managers looking to launch a single-strategy vehicle.

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