Old fund-of-hedge-fund model 'dead'

There have been significant changes in the multi asset sector in the past 18 months, with the old feeder fund-of-hedge-fund (FOHF) model now dead, according to the latest Standard & Poor’s Fund Services (S&P) Multi Asset sector review.

Competition in the sector has increased due to growing demand for transparency, increased liquidity, fee structure changes, and lower stock-market beta products, according to S&P.

During the global financial crisis, the classic FOHF model – which provides access to a range of diversifying active managers but features higher fees and reduced liquidity – failed to deliver the absolute returns or diversifying protection in share market sell-offs that investors expected, S&P stated.

The unattractiveness of the multi sector model was compounded by its high fee structures and the fact that many models that incorporated index-type allocations including exchange-traded funds outperformed the alpha-seeking FOHF model, said S&P analyst Michael Armitage.

The sector also suffered from high profile due diligence failures, he said.

“We view the ‘allocate and pray’ feeder FOHF model as dead,” he said.

“In future, we expect offerings that fail to compete in terms of active oversight, transparent risk management, product-level liquidity, and competitive fees to lose out to the growing competition from newer funds designed from the ground-up to deliver on these features,” Armitage said.

The classical FOHF sector has witnessed significant funds under management outflows globally, S&P stated.

“There were several upgrades in this year's sector review as we recognised funds with some of these product advantages and gained conviction in other offerings that had shown extended track records since our previous reviews,” Armitage said.

Overall S&P upgraded four funds to four stars from three stars, downgraded none, and rated two new funds. Most of the upgrades were in recognition of superior transparency and/or continued solid performance of previously new products, S&P stated.