Smarter investors are pushing funds of hedge funds to consolidation

AUM and fund volume is declining report says

Smarter investors are pushing funds of hedge funds to consolidation
Steve Randall
The funds of hedge funds industry is on the decline and smarter investors are a big reason.

As of June 2017, assets held by funds of hedge funds were U$798 billion according to research from Preqin data analysts; in June 2008 the total AUM was $1.2 trillion.
North American hedge funds hold a total $563 billion with Europe accounting for $205 billion. 

Smart investors have been pulling back on their investments in funds of hedge funds and investing directly themselves.

The number of hedge funds has also been declining with 861 liquidated since 2012 while just 475 have launched globally. In 2007, there were 207 new funds while in the first half of 2017 there were just 10.

“The fund of hedge funds industry faced a series of challenges in the wake of the Global Financial Crisis: a difficult performance environment, changing regulations and a shrinking investor base,” said Amy Bensted, Head of Hedge Fund Products, Preqin. “With assets under management in decline, and more funds liquidating than launching, the industry has turned to mergers and acquisitions in order to diversify value proposition as well as building economies of scale.”

There were 15 mergers or acquisitions between 2000 and 2008, increasing to 57 between 2009 and 2017. This intensified to an average of 35 per year after the financial crisis but has since eased.
However, mega-mergers of larger multi-manager firms have become more prevalent, accounting for a third of all deals.

“It should be noted that 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,” added Bensted. 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. This demonstrates that despite contraction and consolidation, funds of hedge funds still play a crucial role within the wider industry.”