Investment strategies are continuing to modify fund-of-hedge-fund holdings in order to provide more liquidity and potentially more alternative returns.

A sector report from S&P Fund Services into alternative strategies found that fund-of-hedge-fund (FoHF) managers have responded to investor demand for more liquid, cheaper and more transparent avenues to alternative investing.

It further concluded that managed futures and other “long volatility” profile strategies are garnering more allocation within FoHFs.

S&P fund analyst Jason Patton says the sector’s move to liquidity has been slow and steady, following a “gradual unwinding” of funds from operationally risky or illiquid underlying managers.

Since the global financial crisis, investors and model portfolios have increasingly questioned the alternative-return proposition in strategies that fail to buffer their traditional portfolios in periods of market stress.

“Investor demand for multi-asset alternative-strategy products is inextricably tied to the performance and flight-to-liquidity issues that arose in a difficult 2011,” the report states.

“All asset classes and active strategies continue to struggle gaining high conviction or high levels of allocation from retail investors; cash remains king.”

The report found that FoHF sector had adapted to these challenges by adopting more divergent trading strategies.

These include managed futures trend following directional global macro or the usage of volatility index futures or S&P options to profit in periods of high volatility.

“While we welcome the benefit of these strategies to a more diversified FoHF product, the question arises: are investors better served with allocations to only these divergent strategies for their already balanced portfolios?” asks Patton.

The S&P research also found that overall fee levels for FoHF investments are compressing.

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