Key Takeaways
- • Funds of hedge funds grew faster than single-manager hedge funds through Q3 2002: HFR counted 675 funds of funds at the end of Q3 2002, up 32% from 510 at the start of 2000, with assets up 84% versus 24% for single-manager funds.
- • Institutional Investor's first Fund of Hedge Funds 50 ranks Man Group as the largest fund-of-funds manager at $12.4 billion, followed by UBS at $9.9 billion and Union Bancaire Privee at $6.8 billion; the top 50 manage a combined $168 billion.
- • Pension plans are driving demand: Pennsylvania SERS committed $1.7 billion across three fund-of-funds managers, and the Swedish Seventh National Pension Fund allocated roughly $48 million each to EIM Group and K2 Advisors.
- • Fund-of-funds investors pay layered fees, typically a 1% management fee plus up to 10% of profits on top of underlying hedge fund fees of 1-2% and 20% performance fees, per a UBS Warburg study.
- • Overall fund-of-funds performance for 2002 through October was -0.58%, according to HFR, versus a 22.85% decline in the S&P 500 over the same period.
Summary
Institutional demand is central to this growth. The $26 billion Pennsylvania State Employees' Retirement System committed more than $1.7 billion, or $575 million each, to funds of funds run by Blackstone Alternative Asset Management, Morgan Stanley Alternative Investment Partners and Pacific Alternative Asset Management Co. General Motors Asset Management, which oversees a $76 billion pension fund, hired Glenwood Capital Investment, a Man Group unit, as a strategic consultant in 2001. The Swedish Seventh National Pension Fund, with $2 billion in assets, allocated roughly $48 million each to EIM Group and K2 Advisors this summer, a figure later reduced to about $40 million each. CalPERS, with $151 billion, hired Blackstone in 2001 to advise on its hedge fund portfolio.
The ranking places Man Group first with $12.4 billion across Glenwood and RMF Investment Group, ahead of UBS ($9.9 billion) and Union Bancaire Privee ($6.8 billion). Five of the top ten are European, reflecting the segment's roots in private banking. Performance data through June 30, 2002 was incomplete, but Perseus Partners led among firms reporting annual results, with returns above 21% through a short-selling focus.
Managers cite the resource burden of selecting funds as the main rationale for intermediation. Scott Metchick, chief investment officer at EIM, said thousands of managers close quickly, requiring more due diligence in less time. J. Tomilson Hill of Blackstone cited capacity relationships with top hedge funds. Investors pay for this access: a typical fund of funds charges a 1% management fee plus up to 10% of profits, per a UBS Warburg study, on top of underlying hedge fund fees. Against that cost, HFR data showed fund-of-funds returns of -0.58% for 2002 through October, compared with a 22.85% decline in the S&P 500 over the same period.
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