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Funds of funds expect increased competition from single manager vehicles

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A survey of fund of fund managers and executives by accounting and advisory services firm Rothstein Kass suggests that the industry expects intense competition for investment capital as firms work to enhance transparency.

Nearly half of survey respondents indicated that they anticipate increased competition from single manager vehicles, and over 45 per cent expect greater competition from institutional investors replicating fund of funds.

As the sector confronts this challenge, 60 per cent of funds of funds are providing greater transparency to investors in response to market conditions.

"The growth of the fund of funds sector was propelled by its ability to offer portfolio diversification, superior results consistent with specific risk profiles and to some extent, peace of mind. Though investor resolve was shaken by market events and high-profile incidents of malfeasance, the fund of funds industry was sustained by an institutional investment community that recognised that the fundamental benefits were unchanged by short-term market volatility," says Howard Altman, co-chief executive and co-managing principal of Rothstein Kass.

"As they seek to raise new capital, however, fund of funds managers are finding that institutional investors are placing a greater emphasis on due diligence processes. By continuing to act institutional themselves, fund of funds can provide a window into their operating environment to restore investor confidence and effectively compete with single manager vehicles and fund of funds replication strategies that are more aggressively pursuing institutional assets."

Rothstein Kass commissioned market research firm Infosurv to conduct research for "A Call to Action" to gain insight into the trends shaping the fund of funds space and the outlook for the future.

Sixty per cent of respondents indicated that they are providing increased transparency in response to market conditions.

Fifty eight per cent of survey participants would consider lowering fees in exchange for longer investment lock-up periods and 34 per cent of fund of funds are providing increased liquidity in response to market conditions.

Almost half (47 per cent) of respondents suggested that of existing service providers, they would be most likely to review or change their fund administrator relationship this year, while 25 per cent of participants indicated that they would be most likely to review or change their custodian, with 28 percent most likely to review or change their auditor or legal counsel.

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