News & Events

Key Trends in Fund of Hedge Funds (March 2021)

Multi-manager funds were down 0.19% over the first month of 2021, underperforming their single-manager counterparts who gained 0.99% over the same period. In 2020, the fund of funds industry registered a 11.90% return – recording their best annual performance since the inception of the Eurekahedge Fund of Funds Index in 2000. Global equities went on a roller coaster ride in January 2021 as their early gains were erased due to the turbulence of retail investment in the latter part of the month. In the US, Joe Biden's inauguration as the 46th president of the United States, and the Democrats success in winning control of the Senate boosted the performance of the equity market in the earlier period of the month. Investors were optimistic about the proposed COVID-19 relief bill and shift in the foreign policy of the new administration. However, market risk sentiment rapidly deteriorated as the clash between retail investors and notable hedge funds over GameStop stock affected investors' confidence of the stability of the market. As a result, the global equity market as represented by the MSCI AC World IMI Index (Local) only managed to return 0.06% in the first month of 2021, negatively impacting the performance of multi-manager funds.

Total assets managed by funds of hedge funds around the globe stood at US$401.4 billion as of January 2021, continuing the trend of contraction which has persisted since the end of 2010. The industry saw 29 launches and 101 closures last year, marking 2020 as the tenth consecutive year of population decline. 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 since 1999

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 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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