| net asset flows into funds of hedge funds, $bn |
Funds of hedge funds have experienced outflows in the third quarter, but this doesn’t mean investors are turning their backs on the products. Research from HFR indicates a decrease in net inflows to funds of hedge funds over the course of 2005, with $9.4 billion in net inflows in the first quarter, $3.47 billion in the second but an outflow of $1.2 billion in Q3.
In part, the slowdown is attributed to the flat returns produced by funds of hedge funds this year. At the end of September, HFRI’s funds of funds index had returned 5.31%, underperforming HFRI’s weighted composite index by almost 2%. The result, some observers claim, is that investors are now opting to put money directly into hedge funds rather than via funds of funds. In addition, multi-strategy hedge funds, which have been increasing in number, are a new source of competition to funds of hedge funds since they offer diversification without a double layer of fees. Funds of hedge funds argue, though, that they are still the preferred choice of newer investors into the asset class who need their hands held.