Hedge Funds-of-Funds Lose One-Third of Assets in ’08

BOSTON (Reuters) – Hedge funds of funds, the middlemen that pension funds and endowments often use to create alternative portfolios, lost roughly one-third of their assets last year, according to new data released on Tuesday.

The industry’s largest funds of funds, managing more than $1 billion, now jointly control $744 billion in assets, according to industry publication InvestHedge.

In all, the hedge fund industry has $1.8 trillion under management, the magazine estimated. Some industry trackers have said that number is much lower — closer to $1 trillion or $1.5 trillion, after last year’s worst-ever returns.

The magazine found that Swiss powerhouse UBS Global Asset Management A&Q ranks as the biggest player with $34 billion in assets. Union Bancaire Privee is second with $33 billion, followed by HSBC Alternative Investment with $31.88 billion.

Outflows hit the hedge fund industry hard last year, when investors punished fund managers for their worst-ever returns — the average fund lost 19 percent — by pulling out roughly $155 billion.

The trend was especially noticeable among funds of funds that lost an average 16.63 percent, InvestHedge said.

Hedge funds of funds often charge additional management and performance fees on top of the fees that individual hedge funds already charge, making them an especially expensive option, investors have said.

For the fees, funds of funds managers are expected to offer an additional layer of due diligence to keep investors safe, investors said.

Last year, however, investors found that several funds of funds, including ones run by Fairfield Greenwich Group, invested heavily with accused swindler Bernard Madoff. This raised fresh concern about the amount of vetting that funds of funds were actually doing.

As the hedge fund industry shrinks in asset size, executive recruiters also predicted that it will shed jobs. The Options Group forecast that hedge funds could eliminate as many as 20,000 jobs around the world this year, marking a 14 percent loss.

(Reporting by Svea Herbst-Bayliss; editing by Jeffrey Benkoe)