FoHFs Fall Out Of Favour
Friday, July 16, 2010

A Preqin survey of 50 institutional investors in hedge funds reveals that investors are re-evaluating their fund of hedge funds investment strategies and seeking to commit to single manager funds.

Almost two-thirds (64%) of respondents made their first hedge fund investment through a fund of hedge funds, but just 36% of these investors continue to pursue investments in such funds, according to Preqin's survey.

Investors surveyed included public and private sector pension funds, asset managers, insurance companies, banks, foundations, family offices and endowments. Respondents were from all regions. They were asked about their current hedge fund portfolios, investment strategies and interest in both funds of funds and direct investment in hedge funds.

Key findings of the Preqin survey include:

• 80% of respondents that have moved away from funds of hedge funds did so in 2008 or after.
• 36% of respondents that currently invest solely in funds of hedge funds plan to move towards direct hedge funds in the
  future.
• 60% of respondents cited the extra layer of fees as the main reason they moved away from funds of hedge funds.
• Greater control over their investments (54%) and more in-house resources (13%) were other reasons cited for the move
  into direct investment.
• Public pension funds still invest heavily in funds of funds, with two thirds of public pension funds only investing through
  funds of hedge funds.
• Endowments and insurance companies are the largest investors in direct funds, with 66% and 50% respectively only
  investing in hedge funds directly.

Katy Johnson, Senior Research Analyst said:

“Funds of funds are still viewed positively by institutional investors, with many using them as an educational tool to familiarize themselves with an often opaque and confusing asset class. With new investors making their first commitments to hedge funds all the time, fund of hedge funds managers can expect to pick up new mandates from these new entrants into the asset class. As the institutional market continues to mature we can expect single manager funds to gather more capital from an increasingly sophisticated audience."

"It is vital that managers of funds of funds know which investors are looking to take their first footsteps into the asset class in order to market their funds to the correct audience, while managers of direct funds can identify prospective future investors through gathering intelligence on investors currently focused on multi-manager funds.”