Funds of funds continue to stutter, says S&P Capital IQ

InvestorsLaunchesOperational Risk
06 Jun, 2012

More than 90% of funds of hedge funds would be “ungradable” if their performance had been measured against absolute as opposed to relative return targets, S&P Capital IQ Fund Research, a data provider, has said.

The findings said the average fund of funds lost 5.7% in 2011, a marginally bigger decline than equities which saw the S&P Global 1200 fall 5.1% with Asia/emerging markets focused managers faring the worst.  Nevertheless, according to Hedge Fund Research, funds of funds have returned 3.08% year-to-date (YTD) 2012.

The S&P Capital IQ paper highlighted funds of funds particularly suffered when equity markets declined or in periods of liquidity withdrawal. Like countless industry surveys before it, S&P Capital IQ acknowledged funds of funds’ Assets under Management (AuM) continued its decline. BarclayHedge currently puts funds of funds’ AuM at $533 billion, a far cry from the industry’s 2007 peak of $1.2 trillion.

Funds of funds have struggled since 2008 when many suffered horrendous underperformance. A 2012 survey by Deutsche Bank’s prime brokerage business revealed 55% of investors were foregoing funds of funds and allocating directly although this figure is slightly down from 2011 when 62% said they would shun funds of funds.

Despite the case for funds of funds being routinely challenged, S&P Capital IQ argued they are not obsolete. “The returns of hedge funds are far from perfectly correlated with traditional asset categories and a fund of funds offers both strategy and manager diversification albeit with another layer of fees. An allocation to funds of funds can therefore improve overall efficiency (give a better risk/return trade-off) of an investor’s portfolio,” read the report.

The paper added macro and systematic trading, low beta equity hedge and fixed income strategies did a reasonable job of containing losses.

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