Funds of funds continue to suffer redemptions, according to eVestment
Investors redeemed capital from funds of hedge funds for the ninth consecutive quarter albeit at a slower rate, according to a report by eVestment, a research company.
Investors pulled out $11.9 billion from funds of hedge funds during the third quarter of 2013, with total capital now controlled by the asset class standing at approximately $876.7 billion. Nonetheless, the amount of assets in hedge funds coming from funds of hedge funds declined to an all-time low of 32%, added eVestment.
The decline of funds of hedge funds was also evidenced in an investor survey conducted by the prime brokerage business at Goldman Sachs, with the asset class comprising just 35% of respondents, a decline from 61% in 2008.
Performance at funds of hedge funds has improved markedly though in 2013 after several years of heavy losses. Data from the Chicago-based Hedge Fund Research shows funds of hedge funds gained 7.47% last year, narrowly trailing the average single manager who produced returns of 8.31%, although this has not prevented redemptions from continuing.
“Performance measures between hedge funds and funds of hedge funds, particularly when looking at the largest funds of hedge funds are nowhere near as wide as in previous years,” said Peter Laurelli, research group vice president at eVestment and report author.
A number of funds of hedge funds have revitalised their businesses by focusing on emerging managers or niche strategies, which tend to outperform, a point made in the eVestment paper. Many poor performing funds of hedge funds have also liquidated or merged to attain economies of scale, while others are customising portfolios, reducing fees and providing more advisory services.
However, funds of hedge funds are facing immense competition from investment consultants. Deutsche Bank’s Market Prime Finance’s 2013 Alternative Investor Survey confirmed as much. Sixty per-cent of allocators told Deutsche Bank they used consultants, an astronomical rise from 30% in 2011.
A Barclays Prime Finance report calculates investment consultants control roughly $830 billion or one third of the total capital invested in hedge funds, with much of this money having originally been controlled by funds of hedge funds.