Funds of funds outperform single managers, according to Eurekahedge data

Funds of funds have so far outperformed single managers year-to-date as the once troubled asset class continues to make a recovery, according to Eurekahedge.

Data from Eurekahedge said funds of funds were up 3.83% in 2013 compared to single managers, which made gains of 3.54%.  The demise of funds of funds has been long prophesised amid widespread liquidations and mergers following a period of dreadful performance after the financial crisis, although this pessimism appears to be premature.

Figures from the Chicago-based Hedge Fund Research reveal funds of funds made gains of 4.52% in 2013, just trailing the average hedge fund, which has posted returns of 4.76%.

Proponents of funds of funds argue these businesses have re-invented themselves, electing to put money to work at niche and emerging managers, while intensifying their operational due diligence, slashing fees and adopting a more advisory-focused role.   

Despite the recent momentum and improvements to their business models, funds of funds’ returns over the longer-term have been poor – the annualised returns for funds of funds over the last five years stands at -0.25%, and this has precipitated a significant decline in Assets under Management (AuM) from $1.2 trillion in 2008 to roughly $810 billion in February 2013, according to data from Preqin.

Predictably, the number of funds of funds’ launches has fallen significantly from 142 in 2010, to just 59 in 2012 representing the lowest number of start-ups since 2000, added Preqin. This decline is further evidenced in Goldman Sachs’ annual investor survey, whereby funds of funds accounted for just 35% of respondents, the lowest level ever recorded, and a far cry from 2008 when they comprised 61% of respondents.

One of the biggest factors behind the waning clout of funds of funds has been the meteoric rise of consultants advising institutional investors, which historically would have gone to funds of funds. The Goldman Sachs survey revealed 65% of pension funds and 45% of insurers now use consultants when allocating into hedge funds, while Deutsche Bank’s Alternative Investment Survey highlighted 60% of investors employed consultants, up from 30% in 2011.

However, not all is lost for funds of funds. A survey by SEI in 2012 said 84% of investors believed funds of funds would exist in 20 years, while 72% acknowledged they still played a valuable role in institutional investors’ portfolios.