GLOBAL - Funds-of-hedge-funds managers are beginning to target smaller investors as larger institutions increasingly invest directly, research by Standard & Poor's suggests.
S&P said assets under management in aggregate hedge funds have grown by more than twice as much as those in FOHFs over the past 12 months as institutional investors increasingly favour investing directly.
S&P Funds Services lead analyst Randal Goldsmith said some groups had recognised this shift and are taking action to meet the changing demands of investors. It said one of the leaders in this move is HDF, which has been adjusting its systems to cope with more customised mandates and reducing minimum investment sizes to smaller institutional and private individuals.
"The diversification benefits of the FOHF model would seem to be of value to these investors," said Goldsmith, "but the relatively high minimum investment thresholds of many FOHFs appear to have discouraged them."
Another group to recognise this opportunity is Permal, which has begun switching its portfolios into separately managed accounts.
"The launch of Ucits-compliant funds-of-funds should also be a way of getting more interest from smaller institutions and private individuals, given typically smaller minimum dealing sizes," said Goldsmith.
"Ucits regulation generally limits the portfolios of the underlying funds to liquid instruments, which has more appeal to retail investors. However, so far, the returns achieved by these funds have been disappointing."
When asked about strategies, most managers interviewed expect a pick-up in stock dispersion to lead to better alpha generation. Despite this prediction however, managers did not seem to be reflecting this in their actions, S&P said. Many, such as GAM, HDF and Olympia, have been reducing exposure to low beta/market neutral equity hedge fund managers and reinvesting into those that apply a flexible beta policy.
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