Evaluating Hedge Fund Performance

CHAPTER 10

Instant Diversification: Funds of Funds

Funds of funds (FoFs) experienced explosive growth in 2003. TASS Research estimated the number of funds of funds has grown to 1,700 compared to 1,250 in 2002.¹ This figure is comparable to Hedge Fund Research's estimate that 500 funds of funds were launched in 2003, and fund of funds assets accounted for more than 38 percent of the hedge fund industry's total assets of $817 billion.² At the same time, the number of funds of funds that had $1 billion or more of assets under management grew from 61 in 2002 to 81 in 2003. Their assets leapt from $199.7 billion to $291.6 billion during the same period. Concurrently, each of the five largest funds of funds had more than $10 billion under management, and together they commanded $63.4 billion of assets, which was a 50 percent increase from the prior year. In 2004, Barclay/Global HedgeSource reported further growth in the FoF industry. Figure 10.1 shows the growth of assets of funds of funds since 1997, as reported by Barclay/GHS. From less than $100 billion six years earlier, the industry now was reported to command assets of almost $500 billion, as of the end of 2004.

As their assets grew, funds of funds also increased their presence and impact as they have become increasingly a primary source of investment capital for single-strategy hedge funds. For a large fund group like London-based Aspect Capital with $2.7 billion of assets under management, 70 percent or more of the assets managed ...