Funds of Hedge Funds Face Challenge in More Sophisticated Investors
This is an interesting trend in the hedge fund industry, fund of hedge funds are struggling to keep clients because their clients are getting more sophisticated. That in turn, has led to more institutional investors selecting their own stable of hedge fund managers rather than relying on fund of hedge funds to manage a fund portfolio for them.
We’ve seen this on the family office side at times, with many family offices developing highly-advanced fund manager selection processes instead of relying on funds of hedge funds, and it appears that institutional investors are doing so as well following the lead of calPERS and other multi-billion dollar institutional investors.
Do you all think this is a positive trend for the industry? I believe that investors who have taken the time to become more sophisticated in their alternative investing should be rewarded with higher returns and lower fees both of which may come in direct investments in fund managers rather than a layer of fees or less impressive returns. I also think it’s a good thing for the fund of funds industry because it forces those managers delivering low or negative returns to strive for alpha and improve their strategy or face losing clients.
What do you think? Should institutional investors and others stick with fund of funds because they offer diversification and often more developed due diligence processes?
This is an interesting trend in the hedge fund industry, fund of hedge funds are struggling to keep clients because their clients are getting more sophisticated. That in turn, has led to more institutional investors selecting…
Yes, I think they should focus on selecting the best fund of hedge-funds rather then trying to mimic what the fof might already be doing or have done.
I think that one outcome of and responses to the financial crisis is that over the time, the “new normal” will be for institutional investors to be sophisticated on their invetsment choices, including that of the fund manager and have the appropriate controls and due diligence framework in place. My view is that this will ultimately put significant pressure on fund hedge funds to demonstrate that they can deliver value to such investors.
We have the past decades seen the pendulum swing from one extreme to another with regards to insourcing/outsourcing of investment decisions. Following a crisis where many hedge funds did not deliver on their return objectives and liquidity promises, it is only natural that more institutional investors opt for an insourced solution. This is in effect a form of increased competition which is what drives progress in any industry. I think that fof will be forced to challenge their business and revenue model and the industry will evolve in a positive direction. Over time, I think investors will perform a quick cost-benefit and opt for the cheapest solution providing that fof start delivering attractive results.
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