Key Trends in Fund of Hedge Funds (June 2022)

Multi-manager funds were down 3.58% over the first four months of 2022, trailing behind their single-manager counterparts who declined 2.12% over the same period. Multi-manager funds have been facing headwinds over the first four months of 2022 as the global economy faced an unprecedented confluence of headwinds stemming from the Russia-Ukraine war, ongoing supply chain disruptions which were exacerbated by the widening COVID-19 lockdowns in China and aggressive tightening of monetary policy by global central banks to combat rising inflation. Consumer prices in the United States jumped 8.3 per cent in April from a year ago, slowing slightly from the 8.5% year-over-year surge in March but remains among the fastest rate in decades. The unexpected persistence of high inflation has prompted the Federal Reserve to tighten monetary policy aggressively to try to cool price pressures, announcing in May a 50bps interest rate hike, the biggest interest rate increase since 2000, with similar moves on the table in the coming months. At the time of writing, the Federal Reserve has raised interest rates by a further 75bps after US inflation hit 8.6% in May, the highest since December 1981. Compounding matters further, the BA.4 and BA.5 Omicron subvariants which are better than previous versions of Omicron at evading the immune system’s defences are steadily gaining ground, adding more uncertainty to the future trajectory of the global coronavirus pandemic.

Total assets managed by fund of hedge funds around the globe stood at US$399.4 billion as of April 2022, continuing the trend of contraction which has persisted since the end of 2010. Investor interest in fund of hedge funds remained unsubstantial, with net redemptions and fund liquidations persisting as the recurring themes of the industry

Figure 1: Industry growth over the years

The fund 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 assets under management (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 remained sceptical about the value proposition of the multi-manager model and the industry AUM slowly but surely declined over the years

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