The Hedge Fund Journal has just published a well presented list of the current Top 50 fund of funds (available here).
The sense of the introductory comments is that the fund of fund model, while evolving, is not facing an irreversible and terminal decline. This is a notable shift from the doom and gloom message from at least some commentators earlier this year.
We certainly see plenty of ongoing need for fund of funds provided - and this is the caveat, to us at least - that fund of funds reorganize as providers of expertise rather than simply providers of capacity.
Intuitively, one of the reasons for the rapid growth of the top 100 hedge funds between 2004 and 2008 was the commensurate growth of the largest fund of funds. It's interesting to remember that, once a FoF is at $20 billion, a 1% allocation is $200 million. At $40 billion AUM, a 1% allocation becomes $400 million. Even in the good times at the peak of the hedge fund cycle, there were relatively few single strategy managers which could absorb allocations of that size. The outcome, unsurprisingly, was a lot of "me too" allocations from the biggest FoF to the "usual suspect" multi strategy managers.
Going forward, investors will continue to have appetite to partner with fund of funds managers, but we expect them to be looking for nimbler (which probably means smaller), and more thoughtful organizations.
Separately, fund of funds will have an opportunity to migrate, totally or partially, towards an alternate model of funds of managed accounts. We continue to believe that managed accounts can add value but, in many cases, investors completely underestimate the degree of accounting and operational complexity involved if they bring even a modest portfolio of hedge funds onto their own systems. Fund of funds are well placed to create the intermediary accounting and risk management platforms needed to maximize the benefits of a managed account structure.
It will be interesting to follow these trends over the next six months.