Research

2015 Key Trends in Funds of Hedge Funds

Introduction

The global funds of hedge funds sector continued to face headwinds with total assets under management (AUM) of the industry in a steady decline since 2011. As of Q1 2015, the AUM of the funds of hedge funds sectors stands at US$505.9 billion managed by a total of 2,988 funds, having declined by roughly US$300 billion since their 2007 peak of US$808.7 billion. The average multi-manager has returned an annualised 5.32% over the last three years, which has been less than sufficient to reverse the decline in AUM coming from increased investor outflows as direct allocation to underlying hedge funds becomes the norm for investors who are wary of the double fee structure inherent to the multi-manager model. Nonetheless, select regional and strategic mandates overseen by multi-managers continue to post strong returns, which combined with the trends of declining fees and reduced redemption periods make a strong case for the fund of hedge funds sector.

The funds of hedge funds sector grew at an accelerated pace in the 2002 to mid-2008 period, increasing the size of the industry from less than US$100 billion to a maximum of US$826.2 billion by March 2008. This growth in assets was accompanied by a simultaneous increase in the fund population, with the total number of funds of hedge funds increasing from below 1,500 to nearly 3,700. The advent of the global financial crisis reversed this trend, with AUM of the industry taking a sharp turn for the worse after steep losses and heavy redemption pressure from investors, causing a number of multi-managers to close shop in the difficult market environment. Following the turbulent times in 2008 and early 2009, funds of hedge funds witnessed a recovery of sorts in 2009, with most of the gains coming from performance. However, this proved to be short-lived as investors grew sceptical about the value proposition of the multi-manager model and AUM stagnated.

Figure 1: Industry growth since 2000
 

The industry showed further signs of recovery late in 2010, with multi-managers posting performance-based gains and witnessing some capital inflows as total AUM climbed to US$650.0 billion by March 2011. The latter half of 2011 witnessed increased risk aversion among investors over the European sovereign debt crisis, leading to significant capital outflows from the industry. Net asset outflows have continued to drain the industry AUM from 2012 to date, as investors have increasingly moved towards disintermediation and investing with hedge fund directly. Meanwhile, competition from liquid alternative products and hedge fund tracker vehicles, coupled with a lacklustre performance on part of funds of hedge funds have also set the industry AUM into a downward spiral from which they are yet to recover.

 

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