In a year of seemingly endless bad news for hedge funds, many hedge fund-of-funds managers, especially institutionally focused firms, actually thrived.
Assets of hedge fund-of-funds managers in Pensions & Investments second annual survey rose 31 per cent to $708.8 billion (all figures are $US) as of June 30 from $542 billion a year earlier. Assets managed in hedge funds of funds for institutional investors worldwide rose 51% to $462 billion as of June 30 and assets managed for US institutional investors were up 27 per cent to $124 billion from a year earlier. Institutions are a growing client base for the largest funds of funds. In aggregate, 65 per cent of total hedge fund-of-funds assets were managed for institutions worldwide, compared with 56 per cent a year earlier.
The growth, especially in assets managed for institutional investors, bucks a massive industry-wide slowdown in net flows. Hedge fund-of-funds flows were down 76 per cent to $29 billion in the first half of the year, against $199 billion for the first half of 2007, according to hedge fund tracker Hedge Fund Research of Chicago.
Merely hanging on to assets was a fairly remarkable feat for fund-of-funds managers, given that underlying hedge funds in their portfolios sustained their worst performance since record keeping began, as evidenced by the -0.75 per cent return in the HFRI Fund Weighted Composite index for the first half of 2008. In fact, 38 of the 54 fund-of-funds managers included in both the 2008 and 2007 P&I hedge fund-of-funds manager surveys had strong growth both as a group and individually.
SEI Investments, for example, showed the strongest growth in a year-to-year comparison with a 77 per cent increase to $1.9 billion, followed by Cadogan Management, which jumped 66 per cent to $7.4 billion, and Evanston Capital Management, which rose 58 per cent to $3.3 billion as of June 30. Only 13 of those participating both years reported a dip in assets, mostly modest single-digit drops.
The biggest drop was sustained by London-based La Fayette Investment Management, whose assets managed in funds-of-funds dropped 26 per cent to $3.9 billion from a year earlier. “P&I’s data confirms that investors remain committed to hedge funds of funds,” said money manager consultant Kevin Quirk, founding partner and principal of Casey Quirk & Associates. “We continue to chuckle about conversations we were having six or seven years ago with people who predicted that hedge funds of funds would be disintermediated, falling out of favour with institutional investors who would be moving in droves to direct hedge fund investing.
“As we’ve been saying for some years now, many institutions prefer to work with an expert intermediary, a professional who is equipped to manage a diverse portfolio of hedge funds. Given recent market conditions that have punished many hedge funds, fund-of-funds managers that can navigate difficult conditions are even more in demand. I don’t see a lot of cracks in the hedge fund-of-funds manager-client relationship right now,” Quirk said.