The fund of funds industry is finally taking a hit, as institutional investors reconsider the wisdom of throwing money at anyone who happens to have a bunch of hedge fund managers on speed dial. These days, apparently, you are actually supposed to perform due diligence and diversify exposure among several funds if you are a fund of funds manager.
The Financial Times explains that assets under-management in funds of funds shrank by 30 per cent last year. The average return was -16.63 per cent, which in itself diminishes the funds. While some managers will make the claim that down 17 per cent is the new “killing it” in a market where the S&P fell 38 per cent. But that wasn’t the way things were supposed to work–it’s still way too correlated with the broader market for many investors.
The FT says that the Madoff scandal has also had it’s impact. Many funds of funds poured money into Madoff scheme, often without making that particular investment “strategy” perfectly clear to investors.
No doubt the pullback from “alternative investment” strategies has also hurt. Although hedge funds have actually outperformed many other asset classes on a relative basis, many institutional investors have been rebalancing their portfolios to move out of hedge funds, private equity funds and other fancier investments.
All told, the industry shrank from around $1 trillion in assets to just $700 billion. More than 27 fund of funds groups that managed $1 billion either closed shrank below the $1bn level last year.
Probably the most shocking part of this news is that the assets under management are only down 30%