Despite funds of hedge funds experiencing challenging fund raising conditions, and a global fall in the assets under management of the industry as a whole, US-based managers have enjoyed inflows and their dominance of the fund of hedge funds universe has grown as a result. Out of the 681 active funds of hedge funds managers listed on Preqin’s Hedge Fund Investor Profiles, 351 are based in the US, with these managers administering two thirds of all assets managed by funds of hedge funds globally.
New York is the established centre of the US fund of hedge funds universe, accounting for 40% of all managers in the country. Despite the pre-eminence of New York, a number of prominent fund of hedge funds managers are also based in other states including Grosvenor Capital Management and Mesirow Advanced Strategies, which are both headquartered in Chicago.
Assets under management of fund of hedge funds managers worldwide have declined from a peak of $1.2tn in 2008, with $784bn currently managed. However, the US seems to have found its feet again and is the only region where fund of hedge funds managers have seen a gain in aggregate assets under management over recent years; US-based managers currently manage $518bn, compared to $477bn and $500bn in December 2011 and 2012 respectively.
Where are these inflows coming from? US public pension funds have historically been a significant source of capital for funds of hedge funds and this looks likely to continue with over three quarters (78%) having expressed a preference for investing with US-based fund of hedge funds managers. Amongst public pension funds making fresh allocations to fund of hedge funds is the Laborers and Retirement Board of Employees’ Annuity and Benefit Fund of Chicago; in Q3 2013 the public pension fund posted an RFP searching for qualified firms to provide long/short fund of hedge funds investment management services. In fact this is in line with a trend we have seen more widely across the industry over recent years, as investors shift away from large multi-strategy funds of hedge funds to more focused vehicles either strategically or regionally. We’ve also seen the emergence of funds of hedge funds as a tool to gain access to niche strategies or smaller hedge funds.
Alongside investments in emerging managers, funds of hedge funds have also historically been a significant source of seed capital for new hedge funds looking to establish themselves in the asset class: this trend looks set to continue as nearly a quarter (24%) will consider seeding new funds. This affinity for funds of hedge funds to provide day one capital could allow investors in these multi-management groups to take advantage not only of the added alpha of emerging managers, but also the opportunity to share in the revenue streams generated by a growing business.
Since the onset of the financial crisis, the fund of hedge funds industry has been through significant changes, including declining assets under management and a significant consolidation of managers. Despite this, US-based managers have in recent years managed to buck this trend and grow in terms of assets under management. Funds of hedge funds initiated 55% of all fund searches in Q3 2013; therefore US-based fund of hedge funds managers look likely to continue being a vital source of capital for the hedge fund industry going forward.