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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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