Multi-manager products boom … but not so much for hedge funds

Multi-manager products internationally have topped the $US1 trillion mark for the first time, with funds of funds the fastest growing segment, according to a report by Cerulli Associates.

The report, ‘Global Multi-manager Products 2006’, shows that manager-of-managers products grew 31 per cent to $US667 billion during calendar 2005, but funds of funds (FoFs) grew by 51 per cent to be almost level pegging on $US665 billion. The total assets in both types of products was up 40 per cent to $US1.3 trillion. Manager-of-manages products use their external managers as sub-advisers and typically have discrete mandates. FoFs, on the other hand, invest in already-established manager funds. Cerulli says the ease and speed with which a manager can invest through the FoF structure appears to be adding to the segment’s rapid growth. The research firm says that the growth of ‘lifecycle’ or ‘lifestyle’ funds, which are FoFs designed to change asset allocation as a person approaches retirement, also helped the segment expand. Despite the growth in the overall FoF market, Cerulli said that hedge FoFs were growing much more slowly. Hedge FoFs, studied separately in the latest report, account for about $US500 billion globally, but this grew more slowly than the manager-of-managers or mainstream FoF market segments. “(Hedge FoFs) inflows have slowed dramatically as returns have not significantly outpaced the cost of ownership. Meanwhile, some institutional investors, after having initially chosen hedge FoFs as the cautious route, have now turned to direct hedge fund investing, either on their own or with the assistance of a consultant,” the report said. “Whether or not this slowdown … is a boon for multi-manager or for direct hedge fund investing is up for debate – these two product sponsors do not often directly compete for the same clients.” Cerulli predicts that multi-manager products will maintain their five-year compound annual growth rate of 16 per cent until 2010, which means they will account for more than $US2.8 trillion before the end of the decade.