Lean Times for Funds of Hedge Funds - Fund of Funds Model in Jeopardy

Lean Times for Funds of Hedge Funds
March 10, 2009, 2:02 pm
The investment pools that provide much of the hedge fund industry’s capital seem to have sprung a leak.

Funds of hedge funds, vehicles that earn fees by investing their clients’ money in various hedge funds, lost more than $300 billion, or nearly a third, of their assets in the last six months of 2008, according to a survey of the industry by HedgeFund Intelligence.

The outflow is hardly surprising. The average return at funds-of-funds, which last year supplied about 40 percent of hedge fund capital, was negative 21.2 percent for the year, according to Hedge Fund Research. The poor performance, combined with the market panic after the fall of Lehman Brothers in September, caused investors to withdraw their money in droves.

The Ponzi scheme Bernard L. Madoff is accused of operating also raised serious questions about the hedge fund feeder system: Consider the turmoil at Fairfield Greenwich Group, which was one of the biggest feeders to Mr. Madoff’s funds. (Even before the Madoff scandal, Fairfield Greenwich was cutting staff.)

The billions of dollars lost in the Madoff debacle, which only came to light in early December, could mean funds-of-funds are still losing assets as investors’ confidence in the industry takes a hit.

“The industry has taken a serious beating, but it is not an industry that is on the brink of extinction,” Niki Natarajan, editor of the InvestHedge, said in a press release about the survey. “What has happened is that the barriers to entry have finally gone up and only those that are serious representatives of the funds of funds industry will win the institutional money.”

Indeed, there does appear to be some concentration in the industry, with the Top 10 fund-of-funds managing 35 percent of the industry’s assets at the end of 2008.

Topping the list was UBS Global Asset Management, with $34 billion in client assets.

Placing a close second was Union Bancaire Privée, with $33 billion in assets. The Swiss bank, which had a close relationship with Fairfield Greenwich, had about $700 million of its clients’ money invested with Mr. Madoff. It will be interesting to see how that affects its place in next year’s rankings.

Below, InvestHedge’s 10 largest funds-of-funds, as of Dec. 31, 2008. Assets are in billions of dollars.

– Cyrus Sanati

Fund of funds Assets
UBS Global Asset Management A&Q $34.00
Union Bancaire Privee 33.00
HSBC Alternative Investments 31.88
Permal Investment Management 24.40
Blackstone Alternative Asset Management 23.65
Goldman Sachs Asset Management 23.50
Credit Suisse 21.90
Grosvenor Capital Management 20.50
RMF 19.30
GAM Multi-Manager 18.40