Consultants outperforming fund of hedge funds
10 September 2013 New York
Image: Shutterstock
Investment consultants oversee approximately $830 billion of the assets invested in hedge funds, a new study has revealed.
The Barclays Prime Finance study, Battle for the Middle: the Evolving Landscape and Value Proposition of FoHFs and Consultants, found that investment consultants and fund of hedge funds oversee more than $1.5 trillion of asset flow from investors to hedge fund managers.
Some $700 billion of assets go through fund of hedge funds, but their average AUM has decreased 5 percent since 2010, while investment consultants’ AUA increased 30 percent.
The investment consultant industry has a “quasi-oligopolistic market structure with one player having a particularly strong market position”, said the study.
Albourne Partners has a 35 percent share of the investment consultant market, according to the study. It has $288 billion in hedge fund AUA.
“While most oligopolies enjoy fairly strong pricing power, the pricing power of hedge fund investment consultants is constrained due to (1) Albourne’s fixed fee model, and (2) services offered by investment consultants increasingly becoming commoditised. Most top hedge fund consultants appear to be fairly similar in their hedge fund investment philosophy and approach (they do differ, however, in their organisation structure and distribution models).”
The study said that investment consultants need to “proactively address certain stumbling blocks”, including building a credible track record of making and managing investments, establishing appropriate information barriers between the advisory and discretionary businesses, and recruiting quality talent.
Fund of hedge funds have been “under stress for some time”, according to the study. In response, they “have adopted changes on a number of fronts to stay relevant and competitive.”
These include offering lower volatility and more diversification than single managers, and reducing average fees on single client vehicles, from the traditional 1/10 model to 80 basis points/5 percent.
The Barclays study added that fund of hedge funds can go further. “By our estimates, even at a 60bps/5 percent fee structure, large fund of hedge funds still can maintain relatively healthy margins (35 percent+).”
During the next 18 to 24 months, the Barclays study predicted that the investment consultant fee pool will grow 15 percent to $1.6 billion, while fund of hedge funds’ will shrink 10 percent to $5 billion.
“Despite all the challenges, we expect that fund of hedge funds will not all be impacted adversely—select [entities], particularly the large ones, will fare better in the face of industry headwinds.”
The Barclays Prime Finance study, Battle for the Middle: the Evolving Landscape and Value Proposition of FoHFs and Consultants, found that investment consultants and fund of hedge funds oversee more than $1.5 trillion of asset flow from investors to hedge fund managers.
Some $700 billion of assets go through fund of hedge funds, but their average AUM has decreased 5 percent since 2010, while investment consultants’ AUA increased 30 percent.
The investment consultant industry has a “quasi-oligopolistic market structure with one player having a particularly strong market position”, said the study.
Albourne Partners has a 35 percent share of the investment consultant market, according to the study. It has $288 billion in hedge fund AUA.
“While most oligopolies enjoy fairly strong pricing power, the pricing power of hedge fund investment consultants is constrained due to (1) Albourne’s fixed fee model, and (2) services offered by investment consultants increasingly becoming commoditised. Most top hedge fund consultants appear to be fairly similar in their hedge fund investment philosophy and approach (they do differ, however, in their organisation structure and distribution models).”
The study said that investment consultants need to “proactively address certain stumbling blocks”, including building a credible track record of making and managing investments, establishing appropriate information barriers between the advisory and discretionary businesses, and recruiting quality talent.
Fund of hedge funds have been “under stress for some time”, according to the study. In response, they “have adopted changes on a number of fronts to stay relevant and competitive.”
These include offering lower volatility and more diversification than single managers, and reducing average fees on single client vehicles, from the traditional 1/10 model to 80 basis points/5 percent.
The Barclays study added that fund of hedge funds can go further. “By our estimates, even at a 60bps/5 percent fee structure, large fund of hedge funds still can maintain relatively healthy margins (35 percent+).”
During the next 18 to 24 months, the Barclays study predicted that the investment consultant fee pool will grow 15 percent to $1.6 billion, while fund of hedge funds’ will shrink 10 percent to $5 billion.
“Despite all the challenges, we expect that fund of hedge funds will not all be impacted adversely—select [entities], particularly the large ones, will fare better in the face of industry headwinds.”
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