Slow Recovery for Fund of Hedge Funds

(June 19, 2013) — Believe it or not, the fund of hedge funds sector is recovering, but at a much slower pace than its direct investment cousin.

More than half of fund of hedge funds saw their assets and revenues increase in the two years to the end of 2102, according to a survey by consulting firm Casey, Quirk & Associates and BNY Mellon.

 “Funds of hedge funds are still in recovery mode from the financial crisis,” said Daniel Celeghin, partner at Casey Quirk. “The shift to direct investments and increased scrutiny of the entire hedge fund business have added to the challenges confronting funds of hedge funds.”

Some 53% of fund of hedge funds reported an uptick to a survey run by the two financial companies, compared with 47% citing similar improvements over the previous two-year period.

But even this glacial pace has not been enjoyed by all in the sector.

Smaller firms, those with less than $5 billion in assets, have grown the fastest since the global financial crisis of 2008, followed by midsize firms – those with assets between $5 billion and $12.5 billion, the survey showed.

Large firms haven’t fully recovered with assets under management and revenue still below the 2008 level. Overall, firms that can still charge a performance fee over most of the assets managed have shown the strongest revenue gains since 2008, the survey showed.

“The firms that can deliver superior products and performance, maintain strong distribution, and offer distinctive advisory and custom services will stand apart and thrive,” said Celeghin.  

Where did these assets come from? Principally, European investors, the survey showed.

“In aggregate, the firms surveyed reported gross sales of $29.8 billion in 2012, with European pensions representing the largest group of buyers,” the survey said. “Outflows totalled $41.5 billion, with investors moving to direct investments in hedge funds considered to be the biggest cause of the withdrawals.”

The companies surveyed said their top priority this year was to hire institutional sales executives.

However, the sector has work to do. In 2010, well over half of search mandates from consulting firm Aon Hewitt’s clients were for fund of hedge funds. In 2012 the proportion had fallen to less than a quarter.

Related content: Fund of Hedge Funds: Not Dead Yet