Fund funds’ funk

Date: Thursday, August 9, 2012
Author: Michelle Celarier, New York Post

Fed-up investors yanked $8B+ in June

Investors are sick and tired of paying fees for little in return, and in no place is that more evident than in the fund-of-funds industry.

In June, investors pulled $8.7 billion from such firms, according to Trim Tabs Investment Research, which said that $50.4 billion came out of funds of funds over the prior 12 months, leading to a $32.1 billion drop in overall hedge-fund assets in that time.

Funds of funds invest in a portfolio of hedge funds for both individual and institutional investors. While some firms are now lowering fees, they typically charge a 1 percent management fee and 10 percent performance fee — on top of the fees that go to the component funds.

“Investors are saying, ‘Why should I pay a second layer of fees while you guys are not going to give me extra performance?’” said Leon Mirochnik, an analyst with Trim Tabs.

Funds of funds have gained 0.9 percent since January, compared with a 2.4 percent gain for hedge funds and an 8.3 percent gain for the S&P 500, according to Trim Tabs.

Funds of funds lost 0.5 percent in June, while both hedge funds and the S&P 500 were in the black.

The latest numbers are a continuation of a trend that began in 2008, when many funds of funds got burned in Bernard Madoff’s Ponzi scheme. Since the end of 2008, fund-of-fund assets have fallen by a third to $522 billion.

Money has been fleeing funds of funds in each of the past four quarters: $15.4 billion left in the second quarter of 2012; $2.1 billion in the first quarter; $22 billion in the fourth quarter of 2011, and $10.9 billion in the third quarter of 2011.

Some institutional investors have been bypassing the firms and investing directly in hedge funds. Over the past 12 months, direct investment in hedge funds has risen by $18.3 billion.

“Institutions can do the research themselves; they do not need to hire a fund of funds to go out and select hedge funds,” said