Preqin: Funds of Hedge Funds Consolidating As AUM Declines

Oct 26 2017 | 9:16pm ET

Funds of hedge funds are resorting to consolidation in order to combat a steady decline in assets under management, according to new research from Preqin, as direct investments become more popular among increasingly sophisticated investors sensitive to fees. 

Over the past decade, AUM in the funds of hedge funds industry has steadily dwindled, falling from $1.2 trillon in 2008 to $798 billion as of June 2017, Preqin’s data shows. As industry assets have declined, the number of new funds of hedge funds entering the market has also fallen year-on-year, from a peak of 207 in 2007 to just 10 in the first half of 2017. 

As a result, fund of hedge funds managers have turned to M&A in order to diversify product offerings and become more attractive to investors. Prior to the global financial crisis, there were a total of 13 mergers or acquisitions among funds of hedge funds. Since 2009, there have been 56. 

Other key highlights from Preqin’s Fund of Hedge Funds Report: 

  • Of the $798 billion in FoHF AUM as of June 2017, 
North America accounts for $563 billion, while Europe oversees $205 billion. 

  • Since 2012, 475 funds of hedge funds have launched globally. In the same period, however, 861 funds of hedge 
funds have liquidated. 

  • There was a sharp uptick in activity in the wake of the GFC: 2009-2013 saw 35 M&A deals, an average of seven a year. 

  • Following 2014, activity has slowed, and 2015-2017 has recorded just 10 such deals. However, mega-mergers of large multi-manager firms have become more prevalent, accounting for a third of activity. 

“Despite the trend among investors to decrease investing in multi-manager vehicles and to focus on investing directly, a majority of institutions do retain funds of hedge funds as a part of their investment portfolio, said Amy Bensted, Preqin’s head of hedge fund products, in a statement. “The advantages of multi-manager vehicles – exposure to flagship hedge funds and insulation from market shocks – have not diminished.

"In fact, almost four out of five public pension funds and sovereign wealth funds invest at least in part through funds of hedge funds, representing a significant amount of capital," she added. "This demonstrates that despite contraction and consolidation, funds of hedge funds still play a crucial role within the wider industry.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. The company's Hedge Fund Online service is a leading source of intelligence on the hedge fund industry, with performance information for over 16,000 hedge funds across strategies and geographies. More than 47,000 professionals in 90 nations use the company’s products. 

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