Based on data in the Eurekahedge database, we estimate the current size of the fund of hedge funds sector to be US$435.7 billion in assets, with 3,124 funds. The current assets under management represent a 17-fold increase in the size of the industry over the last decade although the sector witnessed considerable losses towards the end of 2008 and early 2009.
The robust growth in the funds of hedge funds in the 2000–2007 period was fuelled mainly by the increasing interest in hedge funds among investors, such as pension funds, endowments, trusts and financial institutions. These investors turned to multi-managers for their expertise in fund selection and asset allocation while also seeking to diversify away from traditional equity and mutual fund investments. Furthermore, funds of funds helped investors maintain geographically diversified portfolios without having to personally conduct extensive due diligences on single managers and also to benefit from consistent returns and downside protection.
Over the last 18 months, the global fund of hedge funds universe has gone through what can be called a watershed period for the industry. While the end of 2008 until the start of 2009, marked by widespread redemptions and performance-based losses, was quite brutal for the managers, the latter part of 2009 through early 2010 has been a period of consolidation for the industry.
Figure 1 illustrates the growth of the industry (assets and number of funds) since 2000.