GLOBAL - Increasingly cautious institutional investors have caused a significant decline in the number of hedge fund of funds with assets of between $2bn and $5bn, research suggests.
A survey by Preqin found funds with less than $250m in assets now account for a larger proportion of managers in the industry. It said events such as the economic downturn and the Madoff scandal had left investors cautious, and this had resulted in the proportion of fund of hedge funds managers with less than $250mn in AUM increase from 28% in early 2010 to 35% in Q2 2011.
Overall, the mean fund of hedge funds is now $2.18bn compared with $2.75bn in 2010 and $4.78bn in 2009 said Preqin. Unsurprisingly, the biggest decline in industry AUM occurred between 2008 and 2009, when assets fell 24%. The proportion of firms reporting a decline in AUM increased from 23% between 2007 and 2008, to 43% between 2008 and 2009. In the same periods however, 55% and 17% of firms reported increases in AUM respectively.
In 2011 the number of firms which have increased AUM outweighs the number reporting a decline, said Preqin. If the trend continues as it has done thus far, AUM could increase to $950bn by year-end.
The survey also found an increasing number of fund of hedge funds managers are planning to launch niche, multi-strategy funds during 2011 to satisfy investor demands for increased transparency and liquidity.
Preqin hedge fund data manager Amy Bensted said: "The fund of funds landscape is markedly different to the pre-crisis industry. Assets under management for the industry as a whole are much lower and there is a bimodal distribution of firms emerging, with peaks at the lower end of the scale as the smaller niche boutiques appeal to the maturing hedge fund investors, and at the larger end of the spectrum the "brand name" multi-strategy firms still prove appealing to the newer investor.
"After a difficult few years for funds of hedge funds, the managers that have appropriately adapted to retain investors from the institutional market have regained some lost confidence, and numerous new funds are poised to be launched this year. Growth of industry assets is again in positive territory and if this new era of revived investor interest in funds of funds continues then aggregate AUM will begin to climb towards the $1bn mark."
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