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While the hedge funds of funds (FoF) part of the funds management industry has been particularly damaged by, firstly, the liquidity crisis and, secondly, the stalling of new investments, there are signs of a tentative recovery emerging. Liongate Capital Management, a US$2.2 billion London-based hedge FoF business, reports that in both Europe and the US RFPs from institutional investors are starting to flow.

The manager, which has commenced marketing to Australian super funds for the first time, says it picked up a mandate in Germany last month and has been funded by “two or three” pension funds which delayed making the allocations last year. According to Jeff Holland, one of Liongate’s founding partners, sovereign wealth funds are also looking to get back into hedge FoFs after a hiatus in their investment programs. Liongate was one of the few hedge fund managers which had positive flows last year, with assets growing by 66 per cent, Holland said. However the firm suffered some “modest” redemptions in the first quarter of this year.

HollandAustralia last month with fellow partner Ben Funk that most consultants were still advising clients to hold their allocations as they worked out the structural shifts in the hedge fund market and what it meant for liquidity. “For many it’s a question of timing,” Holland said. “There’s no diminution in appetite (for hedge FoFs). They want to make sure the redemptions cycle is over.” Liongate differentiates itself in a still-crowded hedge FoF space with its top-down style which is actively managed across the various strategies.

Holland believes that the traditional FoF is more a provider of capacity with a good knowledge of the underlying funds but that approach has become commoditised. He says there are questions being asked about the added value of FoFs and there is likely to be a greater differentiation in their fees. Liongate, which was set up in 2004 by Holland, chief investment officer Randall Dillard and then, shortly after joined by Funk, shifts its portfolio weights between hedge fund strategies by three-five per cent per month, which equates to 40-45 per cent a year.

Historical performance is an annualised 11 per cent, although last year returns for the flagship fund was minus 10 per cent. Last year’s loss was minimised because of a reduced allocation to equity-sensitive strategies and an increase to global macro and volatility arbitrage. “Those shifts allowed us to maintain a liquid portfolio,” Holland said. 

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