Decomposing FoHF returns
Where and when funds of hedge funds add and lose value
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07/07/2010
Editor's view: 8 July 2010
Since 2008 there have been very few certainties in the financial world. Whipsawing markets, the ebb and flow of promised regulation and investor confusion have colluded to turn financial veterans into uncertain infants.
In this strange new world, the almost biblical certainties of the past – sky-high performance will beget similarly cloud-bound investment – have been replaced by some new expectations, chief of which is the inexorable rise of the institutional, and ‘safe’, hedge fund manager.
The recent celebrity weddings of Man-GLG and Thames River-F&C only show that this new paradigm has been in the ascendant. The large will inherit the earth, while the meek – small managers everywhere – will scratch around for money from friends and family.
Fortunately, after a worrying run for many of these sub-$500m strategies, it seems that, like many other dead-ends over the past two years, the new order is already crumbling, as chances come thick and fast for smaller managers.
Institutional funds will still attract the lion’s share of cash, but small managers are in demand from large investors looking for opportunities in new regions and among new strategies. Last week, HFMWeek revealed that a recent stampede for emerging market strategies was forcing large investors to lower minimum investment thresholds and retreat from a historical intolerance of being a fund’s largest investor.
Now, a similar need for niche strategies is also helping smaller managers to attract cash and is breathing life back into a moribund fund of hedge funds (FoHFs) sector. In conversation with a $2bn FoHF manager last week, HFMWeek learned that the firm’s smaller, niche strategies have seen inflows pick up, while its flagship fund is busy ramping up its discretionary work, building focused portfolios for clients.
Investors are clearly using niche strategies to de-risk portfolios. And with a surplus of vanilla bond- and equity-heavy baskets still one of the certainties we can all rely on, small nimble managers and strategy-specific FoHFs could be set for some much needed interest.
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