Performance measures between hedge funds and pooled FoHFs have become narrower, according to a new report by eVestment.
Investors have been pulling money from pooled fund of hedge funds (HoHFs) for nine consecutive quarters. However the report found that the rate of decline has slowed in each of the previous three quarters.
Emerging manager FoHFs performed better than non-emerging manager FoHFs in 2013. This trend has occurred each year since 2003.
Peter Laurelli, research group vice president at eVestment, said: “Performance measures between hedge funds and funds of hedge funds, particularly when looking at the largest FoHFs, are nowhere near as wide as in prior years.
“It seems much of the FoHFs’ lagging performance following the financial crisis, ultimately being a meaningful reason for the resulting redemptions, was due to exposure to what were perceived to be less correlated strategies, meaning macro and managed futures products. Strong flows into each strategy post crisis corroborate the idea of an influx of FoHF assets.
“What has likely happened since is a repositioning of FoHFs’ strategy exposures, slowly accepting more market risk from directional strategies, first in the credit space and, based on their recent positive string of inflows, now into equity strategies. While this has closed the performance gap with the HF industry itself, and brought FoHFs back into the allocation argument in terms of risk adjusted returns, it brings up other concerns.
"First, with the massive amount of assets going into credit strategies in the past three years, seemingly climaxing at a time when interest rates appear to be finding their bottoms, have FoHFs slowly repositioned themselves to again suffer a widening performance gap compared to hedge funds? If this is the case, and if recent equity inflows are a sign of the beginning of another multi-year shift by FoHFs, might many be making another slow moving (and slow to reverse) decision to chase performance at a dangerous time?
"This is not definitive analysis of FoHFs fate, but simply questions all FoHFs investors should be asking. For the near term, the declining redemptions from pooled vehicles and seemingly stable flows for managed accounts and other services show decisions made in the last two years appear to be good ones.”