Abstract
The funds of hedge funds (FoHFs) business was robust and growing very rapidly prior to the financial market crisis in 2008, driven largely by the exceptional returns offered by hedge fund investing. However, the crisis had a profound impact on FoHFs as redemption suspensions by hedge fund managers essentially caused the industry to grind to a halt. Even after hedge funds began to return capital in 2009, FoHFs were overly cautious and carried too much cash exposure. Performance suffered accordingly and assets under management shrank precipitously. FoHFs did not share in the hedge fund industry rebound experienced post-crisis – while hedge fund assets are back to near 2007 peak levels, FoHFs assets are only half as great as they were. Does this mean that the FoHFs business is in permanent decline? The answer appears to be no because the underperformance gap versus the broad-based hedge fund industry appears to have been only temporary. Even so, FoHFs face major challenges. These include pressure on fees in a new low-return world and stiff competition where due diligence and other FoHFs services have become commoditized.
Published Version
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