A To Do List for Funds of Hedge Funds

In prior articles, I have noted that funds of hedge funds (FoHFs) are losing assets under management even as the assets of hedge funds have bounced to above pre-crisis levels.  The percentage of assets invested through FoHFs had fallen to 34% in 2010.  The SEI Knowledge Partnership conducted a survey of 220 institutional investors, investment consultants and FoHF managers in June 2012.  The main complaints of investors were the underperformance of FoHFs over the past three years, high fees, lack of transparency and portfolios that are correlated with other asset classes.

The research paper listed seven topics for FoHFs to address:

• Customization of reporting, portfolios (the underlying managers of a FoHF), transparency and liquidity to create complete investor solutions
• Investing in and seeding emerging managers
• Improved risk management during market collapses
• Overdiversification.  Investors are now interested in a "best ideas" portfolio.
• Creating account structures to handle investors' requirements such as separate managed accounts, derivatives, quantitative products and registered products (UCITS and mutual funds)
• Using their subject matter expertise to advise investors on manager selection, portfolio construction, asset allocation and special strategies
• Aligning the fee structure with the investor's interests such as raising the hurdle rate or charging a flat fee

To read the entire paper, the report may be accessed here.