Nov. 16 (Bloomberg) -- Hedge funds attracted $46.6 billion during the first nine months of this year and more than half the money went to middlemen who don't personally oversee the funds.
About $26.4 billion poured into so-called funds of funds, according to data compiled by Chicago-based Hedge Fund Research Inc. The funds now account for almost 40 percent of the $890 billion invested worldwide in hedge funds, up from a third in 2002, Hedge Fund Research reported.
With the number of hedge funds more than tripling to 7,100 in the past decade, investors are turning to advisers for help figuring out which funds to buy. U.S. institutions will increase their investments in hedge funds to $300 billion from $60 billion in the next five years, according to a report from Bank of New York Co. and Casey, Quirk & Acito LLC, an investment management consulting firm in New York.
``Pension funds are using fund of fund firms as consultants,'' said David Aldrich, the London-based head of securities industry banking in Europe for Bank of New York. ``It's impossible for pension funds to know all the hedge funds.''
Obtaining advice on which hedge funds to buy has meant lower returns than investors would have received had they bought a fund that mimics the Standard & Poor's 500 Index. Fund of funds generated average annual returns of 8.6 percent since 1993, trailing the 10 percent gain of the S&P 500, including reinvested dividends, according to Hedge Fund Research. They rose 1.8 percent on average during the nine months ended Sept. 30.
``This is a disappointing year from a performance standpoint,'' said Ron Rolighed, director at Harris Alternatives LLC in Chicago, whose $2.5 billion Aurora Offshore Fund Ltd. invests in about 50 funds.
Geneva Conference
About 450 hedge fund executives and investors gather today for three days of meetings in Geneva at the annual Global Alternative Investment Management conference. Executives from Man Group Plc, the world's largest publicly traded hedge fund manager with $39.1 billion of assets, and Permal Group, which ranks among the biggest fund of funds managers with about $18 billion of assets, are expected to be among the attendees.
About a third of the offerings in Hedge Fund Research's database, which tracks 4,000 funds, are fund of funds, an investment concept pioneered in 1962 by mutual fund salesman Bernie Cornfeld.
Foundations, endowments and pension funds have flocked to fund of funds managed by firms such as UBS AG's GAM Ltd. and HFR Europe Ltd. HFR's assets have more than tripled this year to $3.3 billion, according to John Godden, managing director at HFR.
Best and Worst Performers
``Fund of funds have performed as we had hoped,'' said Jonathan Hook, chief investment officer at Baylor University in Waco, Texas, who's scheduled to speak at the GAIM conference.
Baylor University, which has a $710 million endowment, has about $35 million in funds of funds. The value of the portfolio rose 15.6 percent in the 12 months ended Sept. 30, Hook said.
Some pension plans or endowments will start investing in hedge funds through funds of funds, with the expectation that they will move on to individual managers once they've gained experience, said Michael Napoli, who heads the hedge fund group at Santa Monica, California-based Wilshire Associates, which has $2.5 billion in hedge fund assets under advisement from institutions.
``But once they get invested and see the due diligence that's needed, they realize they aren't equipped to do it on their own,'' Napoli said.
Harris Alternatives has provided the best performance this year among managers of the largest and most diversified fund of funds, returning 4.15 percent in the first nine months, according to data compiled by Bloomberg.
The $1.4 billion RMF Absolute Return Strategies I Ltd. fund of funds, run by London-based Man Group, rose 0.5 percent during the same period including reinvested dividends, the company said.
To contact the reporters on this story:
Katherine Burton in New York at kburton@bloomberg.net and Samantha Lafferty in London at slafferty@bloomberg.net
