Assets under management by the most institutional of hedge fund-of-funds managers dropped 37% — a whopping $172 billion — in the nine months ended March 31.
All but two of the 25 largest managers of hedge funds of funds for institutional investors saw double-digit drops in assets under management as of March 31 or their most recent date available —compared with June 30, 2008. In fact, 16 managers experienced asset declines of more than 25%.
(Assets of two firms in last summer's top 25 institutional hedge funds-of-funds managers — BlackRock Inc. and AIG Investments — were not included in this analysis because they did not provide data or the data were not publicly available. Their assets as of June 30, 2008, totaled $34 billion.)
The reversal of fortune of some of the largest institutional hedge fund-of-funds managers has set the stage for a huge shakeout expected in the second half of 2009, sources said, as institutional investors replace managers that had any or all of the following problems:
•exposure to the Madoff Ponzi scheme and other hedge fund frauds;
•gated or otherwise restricted redemptions;
•mismatched liquidity terms of investors and those of the underlying fund managers;
•poor relative 2008 performance; and
•massive redemptions from high-net-worth investors and private wealth management platforms for structured products or other strategies.
“I am surprised at how few firms are in the 'safe' camp,” said Daniel Celeghin, director at vendor consultant Casey Quirk & Associates LLC, Darien, Conn.
“If you take broad hedge fund performance as the separator ... you are in good shape if assets under management are down by at most 25%. ... By focusing on the firms with "good' numbers (a drop of less than 25%), you see a list dominated by institutional guys who never went for structured products or high-net-worth investors in general in a big way.”
Three of the firms on Pensions & Investments' list of the 25 largest institutional managers — Union Bancaire Privee, Man Investments and EIM Group — had exposure to Bernard Madoff's Ponzi scheme, either directly or through feeder funds managed by Bernard L. Madoff Investment Securities LLC.
Sources agreed that a firm's Madoff exposure probably will become the most important factor for institutional investors.
“If you had Madoff, you're out as a hedge fund-of-funds manager, no matter how small your investment. The career risk for an institutional CIO is just much too high to allow you to retain such a manager,” said Mr. Celeghin.