The Return of Funds of Hedge Funds

According to the March 7th issue of Pensions & Investments, investors are using fund of fund managers to manage their hedge fund portfolios.  They are turning to the largest managers such as BlackRock Inc., Blackstone Alternative Asset Management, Grosvenor Capital Management, Mesirow Advanced Strategies, J.P. Morgan Alternative Asset Management, Pacific Alternative Asset Management and UBS Hedge Fund Solutions.  There are several reasons for this change from the trend of directly investing in hedge funds:

• Internally managed portfolios have earned poor returns or are getting fund of hedge fund returns
• Investors are outsourcing their allocation models for niche, specialty or capacity constrained portfolios
• Florida State Board of Administration investing $300 million in the commodity trading advisor (CTA) niche
• Investors are allocating more to their alternative investment assets and want customized solutions
• Fresno County Employees' Retirement Association is adding to its portfolio - $156 million
• Plymouth County Retirement Association is increasing its hedge fund allocation by $10-20 million
• New investors want customized solutions
• Japan Post Bank wants to allocate $10 billion by March or April
• Illinois State Universities Retirement System hired Pacific Alternative Asset Management Co. and KKR Prisma to manage $500 million

According to Joshua Levine, managing director and head of business development, of BlackRock Inc., the new investors and existing investors allocating more assets are onboarding using separate managed accounts that "offer more control, better pricing and improved transparency".  The article does note that the largest, most well known fund of fund managers are receiving most of the new business.  Medium and small sized managers are not part of this trend.