Standard & Poor’s Fund Services says fund of hedge fund managers are targeting smaller investors because disappointing returns, redemption difficulties during the financial crisis and additional fee layers have put off big institutional investors.
In its latest review of the fund of hedge funds sector, S&P says assets under management for direct investment in hedge funds was more than double the growth in funds of hedge funds over the 12 months to March 31.
Lead analyst Randall Goldsmith says bigger institutional investors are choosing to create their own hedge fund portfolios. He says the most basic benefit of a fund of hedge funds is diversification but fees on top of the underlying hedge fund charges can erode this. Bigger institutions are able to create their own diverse portfolios and avoid the charges because they can meet the relatively high minimum investments imposed by underlying hedge funds.
Diversification through direct hedge fund investment is more difficult for smaller institutions and individuals, which leads S&;P to feel there is still a place for funds of hedge funds. Some providers have already responded to the shift in their investor base by introducing Ucits III-compliant portfolios and making changes to their funds.
Goldsmith says: “One of the leaders in this has been HDF, which has spent the last six months upgrading its systems to cope with more customised mandates and reducing minimum investment sizes from euro 100m to euro 30-40m. The launch of Ucits-compliant funds of funds should also be a way of getting more interest from smaller institutions and private individuals, given typically smaller minimum dealing sizes. However, so far, the returns achieved by these funds have been disappointing.”