Assets held by funds-of-hedge-funds (FOHFs) have fallen by a third in less than a decade as investors have pushed more into direct allocations, according to research.

Preqin, a data company, found that declining assets over the past decade have led to increased consolidation among FOHF managers as they seek to diversify product offerings to attract more investors, according to a new report.

Assets held by FOHFs have fallen from $1.2trn (€1trn) in June 2008 to $798bn in June 2017, Preqin reported, as investors have grown more sophisticated and have withdrawn assets in favour of direct investments.

For example, within the UK’s local government pension schemes, some of the newly created asset pools are seeking a direct approach to alternatives and unlisted assets.

In addition, an increasing focus on fees paid to fund managers has meant investors have moved away from the traditionally expensive fund-of-funds model.

In a bid to deal this challenging environment, Preqin said FOHF managers were increasingly looking to consolidate. The period 2009-17, following the global financial crisis, produced a total of 56 mergers or acquisitions, compared to just 13 in the period 2000-08.

However, activity over the past two years has slowed, the data company added.

Amy Bensted, head of hedge fund products at Preqin, said: “The fund-of-hedge-funds industry faced a series of challenges in the wake of the global financial crisis – a difficult performance environment, changing regulations and a shrinking investor base.

“With assets under management in decline, and more funds liquidating than launching, the industry has turned to mergers and acquisitions in order to diversify value proposition as well as building economies of scale.”

The report said as industry assets have dwindled, the number of new FOHFs entering the market has also fallen year-on-year, from a peak of 207 in 2007 to just 10 in the first half of 2017.

Since 2012, 475 FOHFs launched globally, but 861 liquidated in the same period.

However, despite a move to direct hedge fund investing, Preqin noted that almost four out of five of sovereign wealth funds and public pension funds still invested in FOHFs.

“The advantages of multi-manager vehicles – to be able to gain exposure to flagship hedge funds and to insulate investors from market shocks – have not diminished,” Bensted said.

Topics