Fund of fund alpha in short supply

Difficult business a fund of hedge funds manager - that is if you believe the adage that there may be 15,000 hedge funds out there, somewhere, but only about 150 or so are much cop.

Is there any reason to think that the quality of fund of funds managers is any better? Or are approximately 99 per cent of them also not up to much?

Alpha is undoubtedly in short supply, says Pauline Skypala considering a Watson Wyatt survey in FTfm. And the expectation of a rising demand for absolute return products, the shortage of real talent looks set to intensify and putting your money to work with the best of the best will become increasingly difficult, if not impossible, and more expensive.

But while Watson Wyatt’s respondents, primarily themselves asset managers, emphasised the need for pension funds and other institutions to build internal resources, investors continued to pour funds into the upper end of the funds of hedge funds industry last year.

Funds grew by more than $264bn, or about 32 per cent, to $1.3tr. And a disproportionate chunk of that was headed to the largest funds of all. The billion dollar club now numbers 151, and totals more than $1.1tr. The InvestHedge database includes a total of 2,700 fund of hedge funds, run by 586 management companies.

Institutional investors clearly prefer the big players. While they account for 78 per cent of assets in the average fund of hedge funds, more than two fifth of the largest funds take in over 90 per cent of their funds from institutions.

But funds of hedge funds again produced a lower return for their investors than the underlying funds themselves. 2007’s average performance of 8.68 per cent was in line with the previous year’s but the average hedge fund returned over 10 per cent.   Again, fund of hedge fund investors seems to be paying a double dose of fees for sub-par performance.

Little wonder perhaps that Watson Wyatt’s head of global investment is still calling for pension funds to rally round and push down investment costs.