Preqin Blames Madoff for Hedge Fund-of-Fund Downfall

(April 18, 2011) — Following two years of asset declines partly driven by Bernie Madoff and other schemes, a new Preqin survey  shows that the average size of hedge fund-of-funds is down 50% since 2009.

The total hedge fund-of-funds industry is well below its peak of $1.251 trillion at the end of 2008. “The fund-of-funds landscape is markedly different to the pre-crisis industry,” Amy Bensted, Preqin’s Manager of Hedge Fund Data, said in a release. “Assets under management for the industry as a whole are much lower and there is a bimodal distribution of firms emerging, with peaks at the lower end of the scale as the smaller niche boutiques appeal to the maturing hedge fund investors, and at the larger end of the spectrum the ‘brand name’ multi-strategy firms still prove appealing to the newer investor,” she said.

According to Preqin’s findings, based on the current pace of inflows, hedge fund-of-funds managers could be managing roughly $950 billion worldwide. The mean fund of hedge funds currently manages $2.18 billion, compared to $2.75 billion in 2010 and $4.78 billion in 2009.

The decline, the alternative asset research provider explained, is largely due to heightened investor caution as a result of fraudster Bernie Madoff’s multi-billion dollar Ponzi scheme, stating: “Changes in the industry are a consequence of increased investor caution following the economic downturn and the Madoff incident.”

Furthermore, Preqin noted that as the industry continues to recover from the difficulties of the past couple of years, the firm is seeing an increase in niche, multi-strategy offerings which meet changing investor demands.

Earlier this month, a white paper released by Infovest21 showed that pensions will increase their direct allocations to hedge funds in 2011. Additionally, a recent survey released by Goldman Sachs noted that investors are increasingly turning to hedge funds with short lockup periods. The study — conducted in late January and titled the Goldman Sachs Prime Brokerage Eleventh Annual Global Hedge Fund Investor Survey 2011 — showed that hedge fund customers plan to allocate 90% of new investments in 2011 to firms that agree not to tie up money for more than one year.

“The top factor driving hedge fund investments is the search for diversification in portfolios in the institutional space,” Jon Waite, director of investment management advice and chief actuary at SEI Institutional Group, told aiCIO, describing the intense volatility of the past several years. “Efforts by pensions to avoid volatility, as well as a general growing acceptance of alternatives, has fueled the trend toward hedge funds,” he said.

Recent findings by Moody’s Investor Services reiterated the trend toward hedge funds, showing that hedge fund managers will be forced to reduce their fees and risk tolerance while altering their business strategies as pensions increase their allocation to the sector.