Institutions move away from hedge funds of funds

Institutions that invest in alternatives such as private equity and real estate are increasingly opting to deal directly with specialist fund managers rather than via funds of funds.

Towers Watson, a pensions and investment consultancy, said the number of hedge fund mandates awarded to direct fund managers last year was nearly three times higher than for funds of funds managers. The number of direct private equity mandates was nearly four times higher than via funds of funds and the number of direct real estate mandates nearly ten times higher.

The consultancy’s research among its clients also found that in the past five years, mandates to funds of hedge funds have declined by two-thirds and mandates to private equity funds of funds have declined by half.

Prior to 2008, funds of funds seemed to make sense for many institutions because they promised to lower the risk associated with alternative asset classes. Institutions would give their money to an intermediary manager, which would invest it in several funds, thus spreading the risk that an investment in a particular fund would go bad, while also offering potentially high returns if the intermediary demonstrated skill in selecting managers.

But in recent years, when the performance of many alternative asset classes has been patchy, the fees charged by funds of funds managers have been hard to justify. Institutions have also become wary that some funds of funds failed to give comprehensive information about the nature of their underlying investments. By investing directly in alternative managers, institutions can generally attain more transparency, which is important for compliance reasons.

“Throughout the past five years the direct alternative fund managers that we have put into client portfolios have shown their ability to adapt to the changing environment and generate good net-of-fees performances,” said Craig Baker, global head of investment research at Towers Watson.

“Larger institutional funds are likely to continue to invest directly for most alternative asset classes rather than via funds of funds as investors continue to focus on better fee structures and greater transparency.”

©2012 funds europe

HAVE YOU READ?

THOUGHT LEADERSHIP

The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
FIND OUT MORE
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…
DOWNLOAD NOW

CLOUD DATA PLATFORMS

Through AI and ML and cloud-enabled ecosystems, managers are finding ways to cut operating costs, supercharge the customer experience and add value to the bottom line.
FIND OUT MORE

PRIVATE MARKETS FUND ADMIN REPORT

Private_Markets_Fund_Admin_Report

LATEST PODCAST