# FoHFs – shrinking without trace?

## Funds of hedge funds are struggling to attract investment more than the funds they invest in

Funds of hedge funds (FoHFs) account for 28.25% of the hedge fund industry's asset base (figure 2) compared with year-end 2008 assets under management (AUM) of about half all hedge fund assets. Since then, the ratio of FoHF AUM to hedge fund AUM has risen in only one quarter – Q3 2014. Cumulatively, the fund of hedge funds industry has experienced net investor redemptions of -$382.67 billion since the end of 2008. Total FoHF assets under management stood at$841.57 billion at the end of Q1 2016. Over the past four quarters, net investor flows were -$50.29 billion and asset change due to performance was -$51.53 billion. Multi-strategy FoHF AUM, a subset of the wider industry figure, stood at $653.3 billion at the end of Q1 and represented -$43.88 billion of net outflows from the industry.

Figure 4 illustrates the evolution of FoHF fees over the past 15 years. We show average headline fees for FoHFs with inception dates during or prior to the year in question and actively investing through that same year. On average, FoHF management fees have fallen by approximately 6 basis points (bps) and incentive fees increased by 89bps over the past 15 years. However, since year-end 2009, we have seen a declining trend in management fees. A similar trend for incentive fees is clear since 2011. Our analysis excludes any additional fee disclosures such as custodial and administrative costs that may be assessed by firms annually.

The weighted average AUM of underlying funds increased 15.50% annually on an average basis and 32.26% on a median basis over the past 18 quarters (see figure 5). In contrast, total hedge fund industry asset grew 4.65% over the same period. There is also a decreasing differential between sample average and median of weighted underlying fund size since 2012–13 levels, suggesting widespread convergence in the attitude of FoHFs toward appropriate portfolio fund size and/or capacity constraints since 2011.