Institutional investors will continue to be the biggest determinant of the future of hedge fund-of-funds managers in the next five years, said a group of observers who shared their predictions with Pensions & Investments.
And the shape of the fund-of-funds industry will have an equally profound impact on hedge funds themselves, given that an estimated 80% of annual inflows into hedge funds comes via funds of funds, said Charles Biderman, chief executive officer of TrimTabs Investment Research, Santa Rosa, Calif.
The $745 billion of assets managed by hedge fund-of-funds managers at the end of the second quarter accounted for 44% of the $1.7 trillion of hedge fund assets tracked by Hedge Fund Research Inc., Chicago. Thats up from 36% in 2005, 17% in 2000 and just 5% in 1990, according to HFR data.
Most sources interviewed said funds of funds will remain the primary way for institutional investors to invest in the complicated hedge fund arena.
We definitely believe that institutional investors will continue to use hedge funds of funds, said Kevin P. Quirk, partner at strategic consulting firm, Casey, Quirk & Associates LLC, Darien, Conn.
Jaeson Dubrovay, senior consultant and head of the hedge fund group at New England Pension Consultants Inc., Cambridge, Mass., agreed: Given the blowups weve seen, its very doubtful that youll see many pension funds moving to a direct hedge fund program from hedge funds of funds.
Mr. Quirk noted that funds of funds likely will become generally more consultative in their relationships with institutional investors and likely will be pressured to bring their total fees down to between 50 and 80 basis points per year from todays standard of 1% management fee and 10% performance fee.
Other sources agreed funds of funds will remain an important vehicle for institutional investment in hedge funds, but said the investment model is beginning to change.
Eric C. Weber, principal and chief operating officer of boutique investment bank Freeman & Co., New York, said the new hedge fund investment model is a core-satellite approach.We look at history, specifically from the mutual fund industry, to predict the development of the hedge fund industry. Similar to the mutual fund industry, which quickly moved away from its early emphasis on equity funds to all kinds of other strategies, the hedge fund-of-funds industry is beginning to get more specialized, Mr. Weber said.