A Preqin survey of 50 institutional investors in hedge funds reveals that investors are re-evaluating their fund of hedge funds investment strategies and seeking to commit to single manager funds.
Sixty four per cent of respondents made their first hedge fund investment through a fund of hedge funds, but just 36 per cent of these investors continue to pursue investments in such funds.
Investors surveyed included public and private sector pension funds, asset managers, insurance companies, banks, foundations, family offices and endowments.
The survey found that 80 per cent of respondents that have moved away from funds of hedge funds did so in 2008 or after.
Thirty six per cent of respondents that currently invest solely in funds of hedge funds plan to move towards direct hedge funds in the future.
Sixty per cent of respondents cited the extra layer of fees as the main reason they moved away from funds of hedge funds.
Greater control over their investments (54 per cent) and more in-house resources (13 per cent) were other reasons cited for the move into direct investment.
Public pension funds still invest heavily in funds of funds, with two thirds of public pension funds only investing through funds of hedge funds.
Endowments and insurance companies are the largest investors in direct funds, with 66 per cent and 50 per cent respectively only investing in hedge funds directly.
Katy Johnson, senior research analyst at Preqin, says: “Funds of funds are still viewed positively by institutional investors, with many using them as an educational tool to familiarise themselves with an often opaque and confusing asset class. With new investors making their first commitments to hedge funds all the time, fund of hedge funds managers can expect to pick up new mandates from these new entrants into the asset class. As the institutional market continues to mature we can expect single manager funds to gather more capital from an increasingly sophisticated audience. It is vital that managers of funds of funds know which investors are looking to take their first footsteps into the asset class in order to market their funds to the correct audience, while managers of direct funds can identify prospective future investors through gathering intelligence on investors currently focused on multi-manager funds.”