Funds of Hedge Funds Shrink by 11% as Losses Spur Redemptions

  • Assets fell more than $100 billion in 12 months through March
  • Dominance as allocators ‘waning steadily,’ eVestment finds

Funds of hedge funds lost more than $100 billion in 12 months because of outflows and poor performance, according to a new report.

Clients pulled $50.3 billion over the four quarters through March, while managers posted $51.5 billion in investments losses, research firm eVestment said Friday after analyzing data from more than 2,500 funds. Assets in the sector shrank 11 percent to $841.6 billion, the lowest since June 2009.

“Their dominance as allocators to hedge funds has been waning steadily since their heyday prior to the financial crisis and we do not currently see any evidence of this trend abating,” eVestment wrote. “Although the industry is certainly far from lost, we have yet to hit the floor on support levels for funds of hedge funds."

Funds of funds, which invest in portfolios of hedge funds, have struggled to keep clients amid disappointing returns from underlying managers and a backlash over the layer of fees the firms charge to act as middlemen. Trimming fees hasn’t helped much because clients can instead invest directly in hedge funds, as the $53 billion Alaska Permanent Fund Corp. opted to do last month. Earlier this year, Aurora Investment Management decided to shutter after redemptions derailed its planned takeover by another fund-of-funds firm.

Funds of funds were once the largest single investor in hedge funds, accounting for almost 50 percent of assets in 2008. Now they make up 28 percent, eVestment found.

Industrywide, hedge funds lost $123.7 billion because of performance in the 12-month period, while flows were essentially flat, eVestment said.

Returns for funds of funds haven’t perked up in 2016. This year through May, the funds were down 1.5 percent, according to the research firm.

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