Pension Funds Cited as Biggest Source of FoF Growth, says Survey

A new survey from alternatives information provider Infovest21 finds that more than half (55%) of fund of funds (FoFs) have a positive forecast, while 24% are neutral and 21% have a negative outlook.

The survey, which polled 35 FoFs, takes an overarching view of the industry’s current environment, recent changes and future outlook.

Funds of funds cite pensions as the biggest source of growth, with 19% agreeing; 9% point to high net worth/family offices as the biggest change in the client base, with another 9% citing foundations.

High net worth/family offices make up about one-third of the average investor base while foundations and pensions each comprise 18%. Endowments account for about 17% of the client base while financial institutions (e.g. banks, insurance companies) comprise 12%.

Asset flow outlook was also largely positive; about half of respondents say that asset flow is stronger, while 35% say it has stayed the same and 15% say it has dropped. The average return / volatility target for 2013 is 9.7%/5.8%.

The most frequent change as cited by about one-third of the funds of funds is offering customized products. Another 28% said they offered more specialized products while 29% said they considered or formed a strategic partnership.

Currently over 60% of funds of funds offer strategy-specific funds of funds, with equity long/short and multi-strategy as the most frequently cited.

Lois Peltz, president of Infovest21 and author of the report, said the average fund of funds allocates 25% to small managers (less than $100 million), 27% to medium-sized managers ($101 million – $999 million), 26% to large managers ($1 billion – $5 billion) and 23% to mega-managers (more than $5 billion).

In rank order, the majority of funds of funds felt “somewhat positive” about: event driven, capital structure arbitrage, credit long/short, equity long/short, relative value, global macro, multi-strategy, merger arbitrage, mortgage-backed securities, activists and special situations.

Fees mostly remained stable: 79% of funds of funds said their fees were the same as last year’s. 6.8% reported an increase in management fees while 3.4% reported a decrease; the same percentages were reported for incentive fees. The average fee structure is a 1.1% management fee with a 5.7% performance fee.