Investors pull $200bn from funds of funds
European managers lost up to 30% of their assets and only two of the top ten attracted more
The roster of Europe’s largest funds of hedge funds continues to comprise the familiar names of yesteryear, but investors have shown their loss of faith in even the most established names by removing $200bn (€140bn) in assets since September last year. Only two of the top 10 managers grew their assets under management.
The 50 largest funds of hedge funds lost between 25% and 30% of assets as investors withdrew funds between the end of September and the end of June, according to research published last week by industry magazine The Hedge Fund Journal, in association with Newedge Prime Brokerage.
This period encompassed both the sharpest end of the credit crunch and the moment of greatest risk aversion among backers of the hedge fund industry.
Of Europe’s 10 largest managers, only two have grown their assets since the end of September. The $25bn Blackstone Alternative Asset Management – part of the Blackstone Group, chaired by Stephen Schwarzman – came top, growing assets by 25%, while Grosvenor Capital Management added 5%, leaving it in sixth place with $21bn.
Schwarzman expects further growth, particularly from pension funds. He said: “Pension plans are under pressure, which ultimately will lead to larger alternatives allocations to get their way out of increasingly underfunded positions. We think their allocations to alternatives will rise.”
Elsewhere, the reading was grim. UBS’ Alternative and Quantitative Investments unit continues to manage more than anyone else, with $31.4bn, but it lost a third of its assets over the period. Union Bancaire Privée lost 28%, retaining $23.8bn. Man Investments, the fourth largest manager, suffered a 46% drop in its assets to $23bn.
HSBC’s Alternative Investments ran fifth, but its $22.3bn assets were just under half what it managed nine months before. The remainder of the top 10 included Permal Asset Management, which shrank 18% to $19bn; Goldman Sachs Hedge Fund Strategies, whose 25% contraction left it with $18bn; Pacific Alternative Asset Management, whose assets fell 10% to $16.2bn; and Lyxor Asset Management, which lost one third of its assets, but kept $16bn.
The $530bn fund of funds community that remains is a shadow of its former self at the end of 2007, when it managed $798bn, according to database Hedge Fund Research. Funds of funds lost 21% on their investments last year, their worst year on record and single strategy hedge funds registered their own annus horribilis in losing 19%.
Funds of funds suffered during the credit crunch when investors demanded money back, frequently to cover debt elsewhere. To raise cash, the funds of funds sought to redeem money from single strategy managers, only to be barred by many of them from doing so. They went on to risk their reputations by pulling money from several high-quality managers that had restrictions on fund withdrawals.
To make matters worse, several funds of funds had positions in funds managed by convicted trader Bernard Madoff. Philippa Aylmer, contributing editor of the study at Hedge Fund Journal, said: “The industry took a beating, along with much else in the financial services sector, and hedge funds felt their share of the pain.” One fund of hedge funds manager said: “Last year is one best forgotten by the hedge fund industry.”
However, one rival added that funds of funds still managed to shield their investors from half the 43% fall in equities last year. It is for this reason that some institutional investors are continuing to consider investing in the industry, although others are choosing to invest directly in single-strategy funds.
Aylmer said, however, that the damage done since September “came as a shock to many within the industry”.
Craig Stevenson, senior investment consultant at Watson Wyatt, said funds of funds would not only survive, but also stage a comeback.
He said: “Allocating to hedge funds is a good way of diversifying portfolios, and with funds of funds on a base fee for the foreseeable future, they are as cheap as they ever have been.”
There is supporting evidence that the pain may be over. Funds of funds made 7% this year, according to HFR, and they have taken in $5bn of new money since the end of March.
Graham Martin, managing director in Europe for Optima Fund Management, said: “This year we are seeing investor allocations into hedge funds and funds of hedge funds.”
Deepak Gurnani, head of hedge funds at rival Investcorp, said the differentiator that decided who would benefit from such inflows was how groups had treated their investors last year. Investcorp did not lock money into funds, but some of its rivals did, eroding trust. Gurnani said pension funds, particularly in the US, had already invested in hedge fund managers via Investcorp this year. A manager at one rival firm said barring withdrawals last year was akin to signing an execution order, as was the failure to communicate effectively with investors when returns started falling.
Not surprisingly, allocators are being selective in which firm they choose to put money with now, and overall funds of funds hold $60bn less than they did at the start of the year. Many investors are seeking reassurance on the calibre of their client lists.
The recent reversal of fortune for some comes too late for at least 200 portfolios, which have folded this year, and Aylmer said small competitors were not out of the woods yet.
“Falling assets and rising costs due to heightened due diligence and compliance demands from investors will continue to have a strong impact on the business viability of smaller funds,” she said.
Stephen Schwarzman, Blackstone Group: Pension funds are under pressure, which ultimately will lead to larger alternatives allocations
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