Fund Of Funds Increase Transparency, Consider Changing Service Providers To Shore Up Confidence

Jun 1 2010 | 9:35am ET

The fund of hedge funds industry expects intense competition for investment capital as firms work to enhance transparency, according to a new survey conducted by accounting form Rothstein Kass. Nearly half of survey respondents indicated that they anticipate increased competition from single-manager vehicles, and over 45% expect greater competition from institutional investors replicating fund of funds. To confront this trend, 60% of fund of funds surveyed said that they 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 recognized that the fundamental benefits were unchanged by short-term market volatility,” said Howard Altman, co-chief executive officer 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."

Increasing transparency isn't the only way fund of funds are upping their game. According to the survey, funds of funds will be shopping around for some new service providers this year, particularly in the areas of administrators, custodians, auditors and lawyers.

The survey found that 47% of respondents suggested that of existing service providers, they would be most likely to review or change their fund administrator relationship this year; 25% of participants indicated that they would be most likely to review or change their custodian; And 28% are most likely to review or change their auditor or legal counsel.

“Fund of fund managers also understand that they will be judged, to a greater extent, on the quality of professional relationships. As a result alignment with reputable third-parties has become a key differentiator in the marketing of these investment vehicles,”  said Jeff Kollin, a director in the financial services practice of the Rothstein Kass business advisory services group.

Other survey results found that 58% of survey participants would consider lowering fees in exchange for longer investment lock-up periods; And 34% of fund of funds are providing increased liquidity in response to market conditions.

Rothstein Kass commissioned market research firm Infosurv to conduct research for the survey, “A Call to Action,” which aims to gain insight into the trends shaping the fund of funds space and the outlook for the future. Results were based on online and/or telephone interviews with 103 fund of fund managers and executives representing a total of 93 companies and 294 funds.


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