Salient to Investors:
Raising cash has gotten a lot harder as underperformance in the past four years has investors doubting the value of funds-of-funds.
Funds-of-funds usually charge fees of 1 percent of assets and 10 percent of profits, on top of the 2 percent management fee and 20 percent performance fee charged by the underlying hedge funds.
Hedge Fund Research claim hedge funds returned an annual average of 13 percent from 1993 through 2007 versus 8.9 percent return for the Vanguard Balanced Index Fund (mix of stocks and bonds) – since 2008 an average 0.9 percent annually versus 3.8 percent for the Vanguard Fund. Funds-of-funds returned an annual average of 9 percent between 1993 and 2007, an average loss of 2.5 percent annually since.
Goldman Sachs survey showed 40 percent of hedge funds came from fund-of-funds at year-end 2011 versus 71 percent in 2004, the peak about four years ago.
Matt Simon at Tabb Group said we are seeing the industry naturally slow die.
Hedge Fund Research report investors withdrew a net $12.1 billion from funds-of-funds in Half1 2012, the most since 2009. Barclays survey shows 23 percent of investors are looking to cut allocations to funds-of-funds in 2012 and near double the amount of those that plan to increase. Funds of fund assets grew about 10 percent in the past 2 1/2 years to $627 billion and versus 2007 peak of $799 billion.
Anurag Bhardwaj at Barclays’s said firms are increasingly advising clients on investing and constructing portfolios, competing with pension-fund consultants who charge lower fees.