The 25 largest hedge funds-of-funds managers ran a collective $364 billion in commingled, separate account and customized strategies as of June 30, up 8.6% from the prior year and higher than the 7.1% 2013 growth rate, and much better than the 7% decline the group experienced in 2012.
The 25 largest hedge funds-of-funds firms control 83% of the assets of the total survey universe.
As with the hedge funds, the same three hedge funds-of-funds companies held the top spots for the third year running:
- Blackstone Alternative Asset Management, up 21.6% to $59.6 billion;
- A&Q Hedge Fund Solutions (UBS), up 21.4% to $30.9 billion; and
- Goldman Sachs Asset Management, up 18.7% to $27.6 billion.
Hedge fund and funds-of-funds managers running less than $1 billion were included in the 2014 survey for the first time. For hedge funds, the nine managers with assets of less than $1 billion each accounted for $6 billion of aggregate assets, and the four smaller hedge funds-of-funds managers contributed a total of $3.5 billion to the universe.
Sources said performance — with acceleration contributed by red-hot domestic and international equity market returns — was a big factor in the growth of both hedge fund and funds-of-funds managers.
For the one-year period ended June 30, the HFRI Hedge Fund Weighted Composite returned 9.1%; HFRI Hedge Fund of Funds Composite, 7.6%; S&P 500, 24.6%; MSCI All Country World, 23.7%; and Barclays Capital U.S. Aggregate Bond, 4.4%.
Industry data for the four quarters ended June 30 from researcher eVestment LLC, for example, showed that for all hedge funds — a much larger universe than the one on which P&I's survey is concentrated — the increase in assets compared to the prior year was $367 billion. Of that, 57% was attributable to performance and 43% was from net investor inflows.
Hedge fund managers, especially the institutionally oriented companies in P&I's survey pool, continued to benefit from two favorable macro factors: the cessation of the “at-your-back tailwind that fixed-income returns provided to institutional investors” and the “frothy” global equity markets, said Kevin P. Quirk, co-founder and partner of specialist money management consultant Casey, Quirk & Associates LLC, Darien, Conn.
“Investors are turning to high-quality credit and fixed-income hedge funds as an alternative to traditional fixed income” and to long/short equity, short sellers and other non-correlated strategies as an antidote to the frothiness of equity markets and to provide downside protection, Mr. Quirk said.
For hedge funds of funds, on the other hand, the vast majority — 94% — of the $71 billion increase in total assets for the year ended June 30 was from performance, with the balance coming from net investor inflows, showed data prepared for P&I by eVestment.
While “net inflows to hedge funds-of-funds managers were very small compared to those for hedge funds in the year ended June 30,” the second half of the 12-month period showed investors were beginning to invest again in hedge funds of funds, said Peter Laurelli, eVestment's New York-based vice president and head of research.
Net inflows to eVestment's universe of hedge funds of funds — again, one that is much larger than P&I's institutionally focused pool — were down $5.8 billion and down $5.4 billion, respectively, from the third and fourth quarters of 2013. The first quarter of 2014 saw net inflows of $13.6 billion, while second-quarter net flows were $82 million.
“We have just exited a long stretch of redemptions for hedge funds of funds, but these managers are beginning to see a turnaround,” Mr. Laurelli said.