Key Trends in Funds of Hedge Funds (June 2020)

Multi-manager funds were down 5.05% over the first four months of 2020, underperforming their single-manager counterparts who lost 4.59% over the same period. In 2019, the fund of funds industry registered 8.59% return - recording their best annual performance since 2009. The strong global equity market supported the performance of multi-manager funds on the back of expansionary monetary policies of the central banks - particularly the Federal Reserve and the ECB, and positive geopolitical development surrounding the US-China trade negotiations. However, market risk aversion resurfaced in the beginning of 2020 as the spread of COVID-19 which was eventually declared to be a pandemic, forced government authorities to impose lockdowns and strict social distancing measures, forcing businesses deemed non-essential to temporarily cease their operations. The global equity market witnessed a substantial decline as it recorded 21.44% loss in the first quarter of the year.

Total assets managed by funds of hedge funds around the globe stood at US$422.3 billion as of April 2020, continuing the trend of contraction which has persisted since the end of 2010. The industry saw 22 launches and 118 closures last year, marking 2019 as the ninth consecutive year of population decline. Investor interest in the 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 fund 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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