2012 has been the year of the deal for the hedge funds-of-funds industry as players seek bigger partners with strong defined contribution and retail investor distribution networks to help them find new sources of inflows.
Five of the 25 largest hedge funds-of-funds managers — Fauchier Partners LLP, FRM Holdings Ltd., K2 Advisors LLC, Prisma Capital Partners LP and The Rock Creek Group LP, managing an aggregate $37.9 billion for some of the world's most prestigious institutional investors — have changed their ownership structure this year or will in the first quarter of 2013.
Their motivation is primarily financial, sources said.
Outflows continue as institutional investors become more comfortable investing directly in hedge funds. And pressure on fees from the remaining institutional clients and prospects is intense, prompting hedge funds-of-funds managers to look for richer fees from defined contribution and retail investors in liquid hedge fund mutual funds, observers noted.
Large multiasset-class money managers have come to the rescue, courting institutional-quality hedge funds-of-funds firms to fill a gap in their investment lineup, sources said.
“Hedge funds of funds are a good solution for traditional money managers that need to add alternative investment capabilities,” said Franklin H. Kettle, managing director of boutique investment bank Colchester Partners LLC, Boston.
“Franklin Templeton (for example) must get asked every day, "What should I do about hedge funds?' by its institutional clients,” said an investment banker who requested anonymity.
“In the current environment, every chief investment officer has the same damn problem — achieving a 7.75% annual return. With low-yielding bond portfolios and wildly volatile equity strategies, companies like Franklin Templeton and others absolutely have to be able to offer hedge funds or be prepared to watch an awful lot of money walk out the door,” said the banker.