Hedge FoFs on the wane with experienced investors

Hedge funds have had a bad rap for a long time, often undeserved. But the global financial crisis coupled with the Madoff scandal has affected their growth. UK-based alternatives research firm Preqin surveyed 50 institutional investors about their investments with hedge funds and hedge funds of funds (FoFs).

The demands of institutional investors following their experiences of the past two years are re-shaping the hedge fund industry as it emerges from the financial crisis, according to a Preqin report.

The report is based on a survey of 50 institutional investors, which included pension funds, endowments, family offices, asset managers and insurance companies, which took place in June.

The survey showed a trend away from hedge FoFs, but this is primarily among those investors with the most experience in the space. There is still good demand for hedge FoFs, especially among newer investors.

“FoFs are still viewed positively by institutional investors, with a significant proportion utilizing multi-manager vehicles as an educational tool to familiarise themselves with the asset class,” the report says.

“(Hedge FoFs) can expect a steady flow of mandates as new investors are constantly committing to the asset class.

“However, as the institutional market continues to mature, we can expect an increasing number to allocate capital to single-manager funds.

“As a manager of FoFs it is increasingly important to be aware of which investors are looking to take their first steps into the asset class in order to market your fund to the correct audience.”

The survey shows that while 64 per cent of respondents gained their first exposure to hedge funds via FoFs, only 36 per cent still invest solely through the multi-manager vehicles.

Most of the respondents who moved away from FoFs did so during 2008, when hedge fund manager Bernie Madoff was charged with defrauding clients over a long period, some of whom were well-known hedge FoFs.

But the desire for lower fees and more control over their investments are the main driver of the trend. A total of 60 per cent say lower fees from direct hedge funds and 54 per cent say the need for more “control” are the top reasons for going into direct investments instead of FoFs.

Of those who remain invested in FoFs, 66 per cent say that this is because of the diversification benefits, followed by 40 per cent who say it is because they lack the in-house resources to thoroughly research underlying hedge fund managers.