Funds of funds: A new role for FoHFs?
Speculation continues about the value of funds of hedge funds. A recent survey of 146 European institutional investors by research firm Investor Source and law firm Clifford Chance revealed a significant drop in interest in funds of hedge funds. Only 50% were investing or considering investing in such vehicles in the third-quarter of 2005, down from 65% at the beginning. And of those investing in both funds of hedge funds and single hedge funds, 18% have switched to invest in just the latter.
A study produced by Edhec Risk and Asset Management Research Centre, to be released next month, will probably encourage more institutions to go directly to hedge funds and skip the middleman. The study claims that funds of hedge funds destroy value through active management. Furthermore, it is claimed that funds of hedge funds significantly increase volatility – the volatility of funds of hedge funds is, on average, 24% higher than the volatility of benchmarks. The study’s authors, Noël Amex and Mathieu Vaissié, say that only 31% of funds of hedge funds add value at an active level.
However, Amex and Vaissié say that 89% of the top 100 funds of hedge funds do add value at the strategic asset allocation level.