Standard & Poor’s latest fund of hedge funds sector update shows funds of hedge funds have lost a 10 per cent market share of the total investment in hedge funds since the latter half of 2008.
The report says that for many years preceding 2008, funds of hedge funds’ market share fluctuated around the 50 per cent mark. This declined sharply at the end of 2008 and early 2009 during the liquidity crisis and the Madoff fraud, which questioned the due diligence of some funds of hedge funds.
S&P says the decline in funds of hedge funds’ market share has slowed since the end of 2009 but their recovery in terms of funds under management is lagging behind single manager hedge funds. By the second half of 2010, funds of hedge funds had a 40 per cent market share, according to S&P.
Single manager hedge funds have recovered more quickly than funds of funds because big institutional investors want to include hedge funds strategies in their portfolios and believe they have the resources to invest directly in hedge funds.
S&P says this is not surprising because funds of hedge funds are built on providing manager and strategy diversification within a single fund, which is more attractive to smaller institutions and of greatest benefit of individual investors who often cannot afford to invest in them.
S&P lead analyst and author of the report Randal Goldsmith says: “Minimum investments are often significantly higher than for mainstream funds, discouraging all but the wealthiest private investors.
“On a more positive note, funds of hedge funds have generally moved on from the liquidity crisis.”