European Crisis Stalls FoF Recovery

Funds of funds that started to recuperate from the 2008-2009 crisis face losses from Europe-focused managers. Some funds of funds expect to recoup those losses and even make money as the European situation stabilizes.

But investors are nervous, given their experience four years ago—in the financial crisis funds of funds could not honor withdrawal requests because many underlying managers froze redemptions. This was particularly galling to investors who had regarded funds of funds as relatively liquid investments.

That, plus the blow to fund of funds’ reputation because a number of them had given their clients’ money to Bernie Madoff, meant investors stayed away from funds of funds. Assets shrank for several years and recovery has been slow. In the first quarter of this year fund of funds assets grew by less than $1 billion while overall hedge fund industry assets grew by almost $53 billion,  according to the BarclayHedge database.

Typically fund of funds seek managers that are diverse in trading style and geography. This effort to diversify has resulted in portfolios that contain Europe-specialist managers.

But mark-to-market declines in the value of European debt and related concerns about liquidity made investors nervous. Nevertheless, some large funds of funds, among them Permal, part of Legg Mason, have been trying to raise capital.

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