Survey: Size Mattered for Fund of Hedge Funds in 2011

In 2011, large managers saw assets under management decline while those in the mid-market enjoyed an average 10% increase, Preqin's latest research shows.

(February 10, 2012) — Assets under management have increased by an average of 10% for mid-sized fund of hedge fund managers in 2011, Preqin’s latest research reveals.

“2011 was a difficult year for the hedge fund industry due to poor performance and investor caution,” commented Amy Bensted, Preqin’s Head of Hedge Fund Research, in a statement. “However, institutional investment in hedge funds is predicted to increase during 2012, meaning that fund of hedge fund managers need to react to investor demand if they are to be on the receiving end of a proportion of these assets,” she said.

The proportion of fund of funds managers with less than $250 million in assets under management continued to increase in 2011 and now stands at 38%. Meanwhile, large fund of hedge funds managers – those with over $10 billion in assets under management – account for 5% of all managers, but 45% of industry assets, Preqin found. The firm concluded that funds of hedge funds remain attractive to smaller investors looking to make their first commitments to the asset class.

According to Bensted, investor demands for improved fee structures, increased transparency, and flexibility in underlying investments is likely to lead to a surge in niche strategies and products as managers seek ways to attract institutional capital.

“If managers react to the changing demands of investors, the fund of hedge funds industry has the potential to grow further, and for AUM to reach the $1 trillion mark once more,” Bensted commented. 

Earlier this year, Singapore-based Eurekahedge Pte. found that last year proved to be the second worst year on record for hedge funds as global markets remained unpredictable amid the European debt crisis, risk-on risk-off investor sentiment, political wrangling, and geopolitical events. The Eurekahedge Hedge Fund Index was flat to slightly negative in December, bringing the yearly number to -4.1%, while the MSCI World Index returned -0.4% in December and was down 9.9% for 2011. For the year, 60% of hedge funds remained in negative territory.

Despite the dismal year for hedge funds, an annual survey by the UK-based National Association of Pension Funds recently showed that pension money is going into hedge funds at a faster rate than other asset classes. The organization found that the allocation to hedge funds has risen from 2.6% to 4.1% over the last year.