Research

2016 Key Trends in Funds of Hedge Funds

Introduction

The global funds of hedge funds industry faces numerous challenges with little let down in investor redemptions since 2010 as the multi-manager model has come under scrutiny over the years. Over the past year, the industry has faced steep redemption pressure from investors witnessing US$52.7 billion in investor outflows alone. Going into 2016, the industry continues to face redemption pressure with its seventh consecutive month of investor outflows ending March 2016. As of Q1 2016, investor outflows of US$5.8 billion were recorded while performance-based losses stood at US$8.1 billion, bringing the current assets under management (AUM) for the industry to a record low of US$451.9 billion.

While investor interest into the funds of hedge funds industry seems to have waned considerably, performance-based figures for funds of hedge funds remain encouraging although modest in recent years. The funds of hedge funds industry has seen four consecutive years of positive performance-based gains from 2012 to 2015, despite experiencing annual investor outflows over the same period. Indeed, select regional and strategic mandates overseen by multi-managers continue to post strong returns which when combined with the trend of declining fees and superior manager selection makes a strong case for the continued relevance of the funds of hedge funds model.

Figure 1a: Global funds of hedge funds industry map
 

The funds of hedge funds sector grew at an accelerated pace between 2002 and mid-2008, increasing the size of the industry from less than US$100 billion to the industry’s record high of US$826.2 billion in 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 a difficult market environment. Following the turbulent times of 2008 and early 2009, funds of hedge funds witnessed a recovery of sorts in the latter half of 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.

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