Funds of Hedge Funds Trail Market, Close as Madoff Still Stings

Date: Wednesday, January 20, 2010
Author: Tom Cahill, Bloomberg

Funds of hedge funds trailed the recovery in the broader market last year and still bear the scars of investments in Bernard Madoff’s $65 billion Ponzi scheme, according to data from Hedge Fund Research Inc.

The firm’s fund of funds index rose 11.6 percent last year, compared with a 20 percent jump in HFR’s Fund-Weighted Composite Index. That’s the biggest gap since the company began keeping records in 1990, HFR President Ken Heinz, told reporters today in London. Funds of funds outperformed the hedge fund index as recently as 2007, he said.

Investors yanked a net $118 billion from funds of hedge funds last year, leaving them with $571 billion, 28 percent less than their 2007 peak and about a third of the overall $1.6 trillion invested in hedge funds, HFR data shows. Madoff’s fraud, the biggest Ponzi scheme in history, caught dozens of funds of funds, prompting questions about whether they had properly researched their investments.

“Funds of funds were under threat from losses before Madoff,” Heinz said. “The experience of Madoff represents an inflection point for their business model.”

Investors use funds of funds to spread their money across a variety of holdings, relying on fund managers to investigate the individual funds.

A net 225 funds of funds went out of business in 2009, the most in a single year since 1990, according to HFR data released today. Gottex Fund Management Holdings Ltd., a Lausanne, Switzerland-based $8.5 billion fund of funds firm, said today it is taking over management of $150 million of fund of funds that had been overseen by Constellar Capital LLC.

“The old business model is likely to continue to be challenged,” Heinz said. “This consolidation will continue to play out.”

To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net