According to prime brokers in New York and London, funds of hedge funds are reducing the number of new managers they are taking on their books, and, in some instances, are reducing their existing portfolios of managers. One prime broker says that some funds of hedge funds have reduced their books of managers by 10% to 20% over the past two quarters.
Vineet Kapur, co-head of North American prime brokerage capital introduction at Morgan Stanley, says his firm has noticed this trend. "We have seen funds of hedge funds decreasing the number of managers on their books, and allocating the extra money among their top existing managers," he says. Increased capacity among the largest and most successful hedge fund managers has enabled investors to put more capital to work with its best-of-breed base. Kapur says that very few top managers are closed to new money.
In addition to giving them the ability to tell end investors that allocation is truly with the best in class, funds of hedge funds are being swayed towards taking on fewer new managers for several reasons, says Kapur.
Reduction
"If a fund of hedge funds has only a small holding in a manager, and does not want to grow that position, or the underlying manager is not itself growing, then ceasing to invest will free up due diligence time and costs that could be spent on a manager whose positive performance will really impact a large portfolio," he says.
