Key Takeaways
- • Funds of hedge funds have reached an all-time high of $818 billion in assets under management as of end-2025, surpassing the previous record of $799 billion set in 2007 before the financial crisis.
- • The industry achieved its strongest performance since 2009, with the average fund of funds returning 10.4% in 2025, according to Hedge Fund Research president Ken Heinz.
- • Separately managed accounts (SMAs) have become increasingly prevalent, enabling institutional investors greater control and transparency over underlying hedge fund allocations and risk monitoring.
- • The fund-of-funds sector was severely impacted by the 2008 financial crisis combined with the Bernie Madoff Ponzi scheme collapse, but structural industry improvements have now allowed it to recover and exceed pre-crisis asset levels.
- • Multistrategy hedge funds like Millennium Management are leveraging SMAs to diversify across 100+ external fund managers, demonstrating evolved fund-of-funds infrastructure and LP due diligence capabilities.
Summary
The fund-of-hedge-funds industry has completed a recovery that took nearly two decades, with assets under management reaching $818 billion at the end of 2025—the highest level in recorded history and the first time the sector has surpassed its 2007 peak of $799 billion. This milestone marks a significant turnaround for a business segment that faced a dual existential threat during the 2008 financial crisis, compounded by the December 2008 collapse of Bernie Madoff's investment scheme, which exposed massive vulnerabilities in the fund-of-funds model and investor due diligence practices.
The recent resurgence is underpinned by strong operational performance. According to Hedge Fund Research, the average fund of funds generated a 10.4% return in 2025, representing the best annual performance for the category since 2009. This performance momentum has attracted capital back into a strategy that institutional investors had largely shunned for years following the Madoff scandal and broader loss of confidence in hedge fund selection expertise.
A critical structural innovation driving the recovery is the proliferation of separately managed accounts (SMAs), which fundamentally alter the relationship between funds of funds and their underlying hedge fund investments. Rather than committing capital to commingled funds with limited transparency, institutional investors increasingly deploy SMAs that provide direct access to individual hedge fund managers while maintaining portfolio-level oversight and risk controls. Ken Heinz, president of Chicago-based Hedge Fund Research, noted that "funds of funds have evolved," highlighting how this infrastructure shift has enhanced LP governance and performance monitoring capabilities.
The adoption of SMAs is evident in practices at marquee multistrategy firms. Billionaire Izzy Englander's Millennium Management has expanded significantly through external fund allocations, with research indicating that multistrategy funds have allocated to more than 100 external hedge funds. This diversification strategy, facilitated by SMA structures, allows large allocators to access specialized investment talent while maintaining consolidated risk management and operational due diligence—a capability that was demonstrably absent during the pre-2008 fund-of-funds era.
The recent resurgence is underpinned by strong operational performance. According to Hedge Fund Research, the average fund of funds generated a 10.4% return in 2025, representing the best annual performance for the category since 2009. This performance momentum has attracted capital back into a strategy that institutional investors had largely shunned for years following the Madoff scandal and broader loss of confidence in hedge fund selection expertise.
A critical structural innovation driving the recovery is the proliferation of separately managed accounts (SMAs), which fundamentally alter the relationship between funds of funds and their underlying hedge fund investments. Rather than committing capital to commingled funds with limited transparency, institutional investors increasingly deploy SMAs that provide direct access to individual hedge fund managers while maintaining portfolio-level oversight and risk controls. Ken Heinz, president of Chicago-based Hedge Fund Research, noted that "funds of funds have evolved," highlighting how this infrastructure shift has enhanced LP governance and performance monitoring capabilities.
The adoption of SMAs is evident in practices at marquee multistrategy firms. Billionaire Izzy Englander's Millennium Management has expanded significantly through external fund allocations, with research indicating that multistrategy funds have allocated to more than 100 external hedge funds. This diversification strategy, facilitated by SMA structures, allows large allocators to access specialized investment talent while maintaining consolidated risk management and operational due diligence—a capability that was demonstrably absent during the pre-2008 fund-of-funds era.
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