HedgeCo News - International hedge fund advisory firm, Rothstein Kass, released a survey report "A Call to Action" on key trends impacting the fund of funds sector. Findings suggest that the hedge fund industry expects intense competition for investment capital as firms work to enhance transparency.
Nearly half of survey respondents indicated that they anticipate increased competition from single-manager vehicles, and over 45 percent expect greater competition from institutional investors replicating fund of funds. As the sector confronts this challenge, 60 percent of fund of funds are providing greater transparency to investors in response to market conditions.
"The growth of the fund of funds sector was propelled by its ability to offer portfolio diversification, superior results consistent with specific risk profiles and to some extent, peace of mind. Though investor resolve was shaken by market events and high-profile incidents of malfeasance, the fund of funds industry was sustained by an institutional investment community that recognized that the fundamental benefits were unchanged by short-term market volatility," said Howard Altman, Co-CEO and Co-Managing Principal of Rothstein Kass.
"As they seek to raise new capital, however, fund of funds managers are finding that institutional investors are placing a greater emphasis on due diligence processes. By continuing to act institutional themselves, fund of funds can provide a window into their operating environment to restore investor confidence and effectively compete with single manager vehicles and fund of funds replication strategies that are more aggressively pursuing institutional assets."
Results were based on online and telephone interviews with 103 fund of fund managers and executives representing a total of 93 companies and 294 funds.
Rothstein Kass commissioned market research firm Infosurv to conduct the research to gain insight into the trends shaping the fund of funds space and the outlook for the future. 34 percent of participants' underlying funds reported assets under management under $50 million, with 36 percent reporting assets under management between $50 and $150 million. 19 percent of survey respondents indicated assets under management between $150 and $500 million, with the balance, 11 percent reporting assets under management over $500 million. Survey participation included but was not limited to Rothstein Kass clients.
Notable findings include:
-- 60 percent of respondents indicated that they are providing increased
transparency in response to market conditions
-- 58 percent of survey participants would consider lowering fees in
exchange for longer investment lock-up periods
-- 34 percent of fund of funds are providing increased liquidity in
response to market conditions
-- 47 percent of respondents suggested that of existing service
providers, they would be most likely to review or change their fund
administrator relationship this year
-- 25 percent of participants indicated that they would be most likely to
review or change their custodian, with 28 percent most likely to
review or change their auditor or legal counsel
"The institutional investment community's trust in the alternative investment sector has not been shattered, but it's fair to say it has been rattled. As they work to thoroughly address the market-driven demand for greater transparency, for many fund of funds, the dynamics of the relationship have changed," said Jeff Kollin, a Director in the Financial Services practice of the Rothstein Kass Business Advisory Services Group. "Fund of fund managers also understand that they will be judged, to a greater extent, on the quality of professional relationships. As a result alignment with reputable third-parties has become a key differentiator in the marketing of these investment vehicles."