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Industry concern over 'fad' of FoAR funds

Date: Monday, October 19, 2009
Author: Nick Ricel, FT Adviser.com

Multi-managers have expressed severe concerns over a possible new wave of funds of absolute return funds, warning their potential underlying holdings are insufficiently transparent or diverse.

As hedge fund managers rebuild their depleted assets by launching Ucits versions of their absolute return strategies, the number of potential underlying holdings for funds of absolute return funds has increased, as has speculation as to whether new products will be launched.

But Morten Spenner, chief executive of fund of hedge funds manager International Asset Management, has questioned whether managers will have enough choice in underlying products, as the overwhelming majority of absolute return strategies have remained outside the Ucits framework.

Meera Patel, senior funds analyst at Hargreaves Lansdown, which has a multi-manager unit, echoed Mr Spenner's views. She added underlying funds would not typically reveal their short positions, meaning any investors in a fund of absolute return funds could have a large short in a company without realising it.

"It worries me the next fund fad will be funds of absolute return funds," she said.

Mr Spenner, who said IAM had no intentions to launch Ucits funds of absolute return funds, said portfolios investing in many different absolute return strategies at once had experienced mixed outcomes as a result of the financial crisis.

He said many funds of hedge funds were experiencing net inflows following the crisis and the backlog of redemption orders had cleared, but multi-strategy funds had suffered from not switching nimbly enough between strategies during the financial crisis.

Partly as a result of the market turnaround, industry assets under management declined from $2.2trn (1.4trn) to $1.4trn at their trough, rather than the apocalyptic halving the industry had anticipated.

Overall, he said, high net worth individuals were still looking at funds of hedge funds, but were doing more due diligence than in the past.

"High net worths are slowly looking to re-enter," he said. "They are doing a lot more research on what they are looking for.

"They are looking more at liquidity and how that's managed, at the structure of the company and who is making decisions. They like things a little cleaner, and there's a greater emphasis on getting it right."

Although Ucits products are typically cheaper and less leveraged than their alternative counterparts, Mr Spenner pointed out fees for funds of hedge funds had in some cases declined 20-25 per cent. While leverage levels in IAM's underlying holdings had previously magnified positions 2.5 times, their overall market exposures had now come down to 1 times assets.

Fund companies have been slow to launch Ucits funds of absolute return funds in the last three years, partly because of a lack of suitable underlying holdings, but also because managers were initially expecting to launch such products through the proposed funds of alternative investment funds (Faifs) regime.

Little progress has been made on Faifs legislation since the collapse of Lehman Brothers, which sparked a crisis in the hedge fund industry and helped unmask its erroneous investments in fraudulent manager Bernard Madoff.