Fund Of Hedge Fund Assets Plunge
Wednesday, April 20, 2011

There has been a significant decline in the number of hedge fund of funds managers with assets under management (AUM) of between USD2bn and 5bn, while those with less than USD250mn in assets now account for a larger proportion of managers in the industry as increased investor caution begins to change the complexion of the fund management industry, according to the latest research by Preqin.

The mean fund of hedge funds is currently USD2.18bn; in 2010 this figure was USD2.75bn, and in 2009, USD4.78bn. The biggest decline in industry AUM occurred between 2008 and 2009, when assets fell 24%. In response to falling investor confidence in the sector, an increasing number of fund of hedge funds managers are planning to launch niche, multi-strategy funds during 2011 to satisfy investor demands for increased transparency and liquidity.

Amy Bensted, Manager, Hedge Fund Data at Preqin, the alternative asset research firm, suggests that the fund of funds landscape is now "markedly different " to the pre-crisis industry.

"Assets under management for the industry as a whole are much lower and there is a bimodal distribution of firms emerging, with peaks at the lower end of the scale as the smaller niche boutiques appeal to the maturing hedge fund investors, and at the larger end of the spectrum the 'brand name' multi-strategy firms still prove appealing to the newer investor," Bensted noted.

Preqin believes that changes in the industry are a consequence of investors' lower risk tolerance following the economic downturn and the Madoff incident. However, Bensted said that the outlook is brighter for the fund of funds sector with investor confidence showing signs of increasing.

"After a difficult few years for funds of hedge funds, the managers that have appropriately adapted to retain investors from the institutional market have regained some lost confidence, and numerous new funds are poised to be launched this year," she observed. "Growth of industry assets is again in positive territory and if this new era of revived investor interest in funds of funds continues then aggregate AUM will begin to climb towards the USD1 billion mark."

Preqin's research shows that the proportion of firms reporting a decline in AUM increased from 23% between 2007 and 2008, to 43% between 2008 and 2009. In the same periods, 55% and 17% of firms reported increases in AUM, respectively.

The proportion of fund of hedge funds managers with less than USD250m in AUM has increased from 28% in early 2010 to 35% in Q2 2011. However, the study reveals that the number of firms that have increased AUM during 2011-to-date outweighs the number reporting a decline. Preqin predicts that if AUM continues to increase as it has done thus far, AUM could increase to USD950bn by year-end.