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Hedge fund trend watch: FoFs swelled to $500bn in 2006, average fund size now $178m

Date: Wednesday, February 28, 2007
Author: Financial Times

The latest edition of the Eurekahedge Global Fund of Hedge Funds Directory estimates the total size of the fund of funds universe at US$500bn as of end-2006, up 35 per cent from their end-2005 estimate, and accounting for nearly a third of global hedge fund assets.

Judging by this and the performance of the Eurekahedge Fund of Funds Index (which rose 10 per cent in 2006 in contrast to 7.7 per cent in 2005), 2006 has, in the main, been a good year for the industry, the report says. The average fund size has grown from $21m to $178m in the last five years alone.

Other tidbits:

  • Fund Size - There has been a marked increase in the number of smaller-sized funds (< $100m), whose share of the total number of funds rose by 10 percentage points to 55 per cent as of end-2006. This indicates a general lowering of the size-barrier, among other things, to new entrants into the industry.
  • While the general pattern of mid-sized funds turning in the best returns still holds true in the case of funds of funds, what is interesting to note is the decidedly better performance of bigger funds (>$1bn in assets), especially in more recent years. As the majority of funds of hedge funds tend to be multi-strategy funds with a global mandate, the larger-sized funds would be better poised to access a wider set of opportunities in the aforementioned upward-trending markets. Furthermore, larger funds of funds are better positioned to access successful hedge funds and to tap into their superior returns, than their smaller-sized peers.
  • Multi-strategy allocations form only about a fifth of total fund of funds assets, while equity long/short is the most popular with over one-third of industry assets parked therein.
  • More than a third of industry assets are still parked in the North American markets, while emerging markets centric allocations account for less than a tenth of the same.
  • However, a comparison of performance by investment region hints at superior returns from, and increasing asset flows towards, emerging markets focused funds. Returns in these funds have indeed steadily gone up over the past five years, with 2006 returns breaching the 20 per cent mark.
  • The US and the UK continue to be key centres of fund of funds management activity, with asset shares at 29 per cent and 24 per cent respectively. Together with Switzerland (17 per cent share of assets), France (5 cent) and offshore financial centres (14 per cent) such as Bermuda and Channel Islands, these locations account for nearly 90 per cent of industry assets.
  • Nearly 60 per cent of the assets in Asian hedge funds alone are managed out of the US and the UK, while investors in Switzerland, the US and the UK make up close to 90% of the sources of these assets.
  • While absolute return funds charge a higher fee than their fund of funds peers, they actually pay the biggest portion of their returns (91.3 per cent) back to the investors among the three fund types compared. Investments into fund of funds vehicles are much dearer by comparison, with the fee component accounting for nearly one-fourth of returns (22.5 per cent).
  • In a peer group comparison of global fund of funds performance against that of hedge funds and long-only absolute return funds, fund of funds returns seem to be achieved at a higher cost to investors, but this is offset by the fact that they offer steadier risk-adjusted returns
A PDF of the report is available here.