Allocations from institutional investors caused hedge funds of funds assets to grow by 30% in the 12 months ended December 2003, according to a survey by consulting firm Watson Wyatt and Global Investor magazine.
That growth corresponds to a rise of more than $41 billion invested in funds of funds, with most of the new money coming from central banks, pension plans, and governments. In Asia, insurance companies accounted for 20% of the inflow.
Globally, the five largest fund-of-funds operations belong to Man Group plc, Permal Group, Union Bancaire Priv?e, Ivy Asset Management, and Goldman Sachs Hedge Fund Strategies Group, the survey indicated. Information was gathered about funds of funds because these are the hedge fund vehicles that have proven to be of most interest to institutional investors.
About 155 fund managers participated in the study, which also covered private equity, real estate, and commodity funds. It ranked the largest players in each category. For instance, in terms of amounts of advisory assets in private equity, Hamilton Lane Advisors was number one.
“The message of increasing diversity in pension fund assets to both reduce risk and increase returns is definitely getting through,” said Nick Watts, European head of investment consulting at Watson Wyatt, in a prepared statement. “Increasing focus on risk in the pension fund and the source of that risk, combined with the need to reduce deficits through increased returns, has accelerated the trend toward investment in alternatives.”
In addition to institutional investors, ultra-high-net-worth wealth managers and family offices are accelerating their adoption of hedge-fund-of-fund investments, according to a Prince & Associates survey of 653 family offices representing more than 34,000 families with $1.2 trillion in investable assets.
The survey concluded that while 45% of family offices invest in funds of funds today, a staggering 84% expect to do so in the next three years.
But despite evidence of increased hedge fund investing activity among independent advisors, RIAs are embracing these strategies at a slower rate than their institutional and family office counterparts.
A survey of RIAs conducted by colleagues of mine at AdvisorBenchmarking found that nearly 59% of 1,095 advisors did not currently use hedge funds and did not plan to begin using them in 2004. By contrast, the survey found that 36% of the RIAs surveyed already invest in hedge funds, or plan to do so this year.
The three primary reasons cited by advisors eschewing these products were lack of transparency (18.2%), difficulty in performing manager due diligence (17.7%), and difficulty in properly educating clients on the products (16.7%).
For the most part, advisors continue to look to the ever-growing crop of SEC-registered hedge funds of funds as the antidote to these three concerns. Registered funds that are subadvised by hedge fund managers require the subadvisor to be registered as an investment advisor. In addition to the manager’s regulatory oversight, SEC registration requires these funds to have independent boards and publish semiannual reports like a mutual fund, thereby increasing transparency. The fund-of-funds structure is attractive to advisors because it delegates the manager selection function to hedge fund due diligence specialists. Moreover, the mutual fund “feel” of registered products goes a long way toward addressing investor concerns with respect to otherwise unregulated hedge fund investments.–Jeff Joseph
Jeff Joseph is managing director of Rydex Capital Partners and serves on the advisory board of HedgeWorld (www.hedgeworld.com), a global provider of hedge fund information and investment products.
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