FoHF strategies under scrutiny

Fund of hedge funds (FoHFs) have registered a ninth consecutive quarter of outflows, with the sector now accounting for an all-time low 32% of total hedge fund assets, according to eVestments latest institutional report.

FoHF strategies under scrutiny


However, the core rate of outflows has slowed in each of the past three quarters helped by a reposition of strategies to accept more market risk from directional strategies, first in the credit space and, based on their recent positive string of inflows, now into equity strategies.

Peter Laurelli, research group vice president at eVestment and the report’s author, pointed out that while this has closed the performance gap with the hedge fund industry itself, and brought FoHFs back into the allocation argument in terms of risk adjusted returns, it does bring up other concerns.

He explained: “First, with the massive amount of assets going into credit strategies in the past three years, seemingly climaxing at a time when interest rates appear to be finding their bottoms, have FoHFs slowly repositioned themselves to again suffer a widening performance gap compared to HFs?

“If this is the case, and if recent equity inflows are a sign of the beginning of another multi-year shift by FoHFs, might many be making another slow moving (and slow to reverse) decision to chase performance at a dangerous time? This is not definitive analysis of FoHFs fate, but simply questions all FoHFs investors should be asking.”

Elsewhere, S&P Dow Jones Indices has made the bold prediction that ETFs will become more popular than hedge funds among investors in 2014. Based on figures from BarclayHedge and BlackRock, Tim Edwards, director, index investment strategy, said total ETF assets are on course to break above total hedge fund assets early this year, if they have not already done so.

He added: “Of course, that is not to say that the role of hedge funds is fundamentally challenged. Indeed, in aggregate they continue to attract new investor capital. But with the search for alpha becoming ever harder, it’s only surprising that it has taken so long for ETFs to gain the larger share of the pie.”