“EVERY HEDGE FUND manager I speak to has at least one ‘hot money’ fund of hedge funds horror story,” says a fund of hedge funds executive. Horror stories are indeed plentiful. “We’ve all heard the story of the hedge fund that went from $100 million to $1 billion in a year, and then back to $100 million a year later due to funds of hedge funds inflows and outflows,” says Adam Sussman, senior research analyst at Tabb Group. This short-term view of parking money and pulling out is becoming a bugbear among hedge funds, which are increasingly turning away fund of hedge funds money.
There are 2,071 funds of hedge funds in HFR’s database alone. Three years ago there were 1,232. Their combined assets under management total $426 billion – one-third of the estimated $1.2 trillion in hedge funds, and market participants...
