Fund of Hedge Fund Investment

According to a Reuters poll this week, funds of hedge fund managers have downgraded expectations for returns over the next six months as global growth and a commodities bull run cooled.

A fund of hedge funds is an investment company that invests in hedge funds, rather than investing in individual securities. Not all funds of hedge funds register with the SEC. Many registered funds of hedge funds have much lower investment minimums (e.g., $25,000) than individual hedge funds. Some investors that would be unable to invest in a hedge fund directly may be able to purchase shares of registered funds of hedge funds.

The quarterly survey of 13 funds of hedge fund managers, which together manage more than $100 billion, showed they expected average returns, with only a few strategies, such as emerging markets, anticipated to bring above average results.

The poll, carried out between August 30 and September 8, showed a shift down in sentiment from the last survey, when half of all strategies were forecast to deliver superior returns in one or both of the following two quarters.

While some managers expect to benefit from an increase in volatility that has gripped markets in recent months, most are turning to strategies that aim to offer consistent returns in any market cycle, such as multi-strategy hedge funds which allocate funds to various sectors and regions.
And while managers trimmed down their exposure to emerging markets, they also forecast above average returns there in the fourth quarter this year.

These funds accounted for 44 percent of new money in 2005, down from 50 percent a year before. Total assets covered by the survey stood at $1.26 trillion (670 billion pounds) last year, up by about a fifth on 2004.

Investors have been encouraged to look beyond the traditional asset strongholds of listed equities, bonds and cash in recent years to reduce exposure to volatile stocks and be sure of getting income they need as populations age.

Funds of hedge funds allow investors to spread their money among a variety of hedge fund strategies in a single package deal.

Last year, pension funds globally invested more than $77 billion pounds of new money in alternative assets, up from $62 billion in 2004.

Property took the biggest share of pension funds’ new money to alternatives, at 35 percent, followed by 34 percent into funds of hedge funds.

Retirement funds are the single largest holder of alternative assets, accounting for about $465 billion, or 37 percent, of the total assets covered by the survey.