GLOBAL - More than a third of fund of hedge fund investors now prefer to allocate funds directly into the asset class, research by Preqin has found.
A survey of 50 global fund of hedge fund investors by the consultancy found 35% favoured direct allocation, despite most institutional investors having started out with exposure to fund of funds.
The survey found 64% of investors gained initial exposure to the asset class through a multi-manager vehicle but only 36% of respondents still invested solely through funds of hedge funds. Some 34% stated a preference for both types of investment, while none of those surveyed began investing directly and then moved towards a funds of funds style of investment.
Preqin found most investors had moved out of fund of funds following the financial crisis, with 80% of funds which have already made the switch doing so during or after 2008.
When asked why they had made the move, 60% of respondents cited lower fees as the key reason. In 2008 and 2009, many institutional investors liquidated portions of their hedge fund holdings and put further investment on ice until markets stabilised, the research found.
When the time came to reinvest their available hedge fund capital, many institutions chose to invest directly in funds, avoiding the extra layer of fees they would be subject to if they invested in funds of funds.
"Most investors that have moved away from funds of hedge funds did so during or after 2008," the report said. "This is in line with the downturn in the financial markets and the Madoff scandal, both of which negatively affected the appeal of funds of hedge funds for a number of different reasons.
"The higher fees and poor performance of funds of funds during and following the financial crisis left many investors questioning the value of such vehicles in their portfolio."
Another popular reason for moving away from such funds was so investors could gain more control over their hedge fund portfolio.
Through the typical funds of hedge funds structure, investors do not choose the underlying investments that they are exposed to. By investing directly institutional investors have complete control of their portfolio, and are able to balance their holdings to match their objectives.
The report added: "Funds of funds are still viewed positively by institutional investors, with a significant proportion utilising multi-manager vehicles as an educational tool to familiarize themselves with the asset class.
Fund of hedge funds managers can expect a steady flow of mandates as new investors are constantly committing to the asset class. However, as the institutional market continues to mature, we can expect an increasing number to allocate capital to single manager funds."
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